You know the commercial that says America runs on a certain
brand's coffee and donuts?
In truth, America runs on diesel. Just ask a trucker, a farmer or a factory
owner.
And right now, they are all hurting. That's because the machines that power
their businesses need diesel, which is commanding nosebleed level prices right
now. At around $5.50 a gallon, diesel prices are up a whopping 75% more than
last year and blew past all-time record recently.
"I can pretty much count on setting on fire $5-$700 a day...minimum," says Eric
Jammer, whose truck has 22 wheels, one of the largest on the road. He's used to
transporting the big stuff — military and construction equipment. He once hauled
an Apache helicopter.
Jammer is cutting back on driving too far away from home in Houston, Texas. At
the most, he hauls goods that are within a day or two from Texas. No more than
that.
Diesel prices have skyrocketed faster than gasoline, which has itself hit record
levels. They're rising so fast because of the same factors that have sent oil
prices up this year. The U.S.'s ban on the import of Russian oil after the
invasion of Ukraine has put a squeeze on diesel.
The U.S. also keeps lower inventories of diesel, and has been exporting more of
the fuel to Europe in recent months to help reduce the continent's reliance on
Russian fuel.
Some truckers might choose to stop driving if prices go up more
Diesel's spiraling price has also contributed to U.S. inflation,
which reached a 40-year high this year.
After all, trucks move 70% of all freight in the U.S. from transporting goods on
land to those that come off a cargo ship or a train.
Most trucking companies pass on increased fuel costs to their customers through
fuel surcharges.
"Ultimately you and I as consumers will see this on the store shelves in the
price of the products," says Bob Costello, chief economist with the American
Trucking Association.
But some independent truck owner operators like Jammer aren't able to pass on
fuel costs. He that operators like him won't be able to continue hauling if
diesel prices climb higher. If that happens, it will result in even fewer
truckers on the road, and that could further drive up the price of shipping.
One home builder is being hit on all sides
Home builder Tom Stringham is on the other end, paying those fuel surcharges.
Extra bills are pouring in from his suppliers — from the concrete company, the
lumber company and from other parts suppliers. All of those factory owners have
machines that also run on diesel, besides the trucks that also haul those goods.
Stringham co-owns Treasure State Builders in Hamilton, Montana. His business
also owns a fleet of pick-ups, two semi trucks, and a forklift, all of which run
on diesel.
In less than six months, Stringham has spent the same amount on fuel as he did
all of last year.
"It's definitely taking it out of the bottom line," he says.
His business is hot. With so many people moving out of cities and into the
mountains during the pandemic, Stringham has been busy making custom homes.
But he's facing long wait times on his deliveries that are dragging out the
length of his projects.
"I've been waiting for 10 months for a bathtub and 11 months for appliances,"
says Stringham. "That's really hard when, I mean, the house has basically been
sitting for a month or two waiting for a bathtub."
Stringham suspects this long wait time is in part due to fuel costs. When diesel
was cheaper, a trucker might make a trip and return on empty. But at current
prices, few truckers are willing to do that.
"Truckers aren't going to haul something to Montana unless they have a full
load, both ways. So it's creating massive delays."
This farmer has kept 70,000 gallons of diesel stored in tanks
Semis also bring in seed from over 150 miles away for Mark
Darrington's farm in Declo, Idaho. He grows malt barley that goes into popular
beers like Coors and Budweiser.
At Big D Farms, Darrington and his sons also grow potatoes, sugar beets, wheat.
He says diesel plays a central role in almost all the equipment he uses — a
sprayer with 100 foot booms to water crops, there's tractors and tillers and
more.
But Darrington's been spared the sting of these high prices so far because he
bought a lot of the fuel back in December, when it was about 40% cheaper than it
is now. He still has about 70,000 gallons of diesel stored in tanks on his
property. But he fears for when he'll have to buy.
"When that's gone, it's gone. And it has to be replaced," Darrington says.
HOUSTON — With
oil prices collapsing and companies in retrenchment, a federal auction in the
Gulf of Mexico on Wednesday attracted the lowest interest from producers since
1986.
It was the clearest sign yet that the fortunes of oil companies are skidding so
fast that they now need to cut back on plans for production well into the
future.
The auction, for drilling leases, attracted a scant $22.7 million in sales from
five companies, but energy analysts said that came as no surprise on a day when
the American oil benchmark price plummeted by more than 4 percent. For the first
time since the recession, it is approaching the symbolic $40-a-barrel level.
Last summer, it was above $100 a barrel.
A glut on American and world markets is to blame for the depressed prices, but
the unusually large daily decline occurred after the Energy Department, in a
report, lowered its oil price projections and showed a considerable increase in
inventories.
Until now, most companies have insisted that they would not sacrifice production
in future years when they said oil prices were sure to rebound strongly. But in
recent weeks, executives have expressed concern that the oil price collapse
could last through 2016 and even 2017, and it is important that they tighten
their belts even more.
Continue reading the main story
Oil Prices: What’s Behind the Drop? Simple Economics
The oil industry, with its history of booms and busts, is in a new downturn.
“The financial squeeze is tighter than people thought, so tight that the
companies can’t even bargain-hunt for leases for future production,” said
Michael C. Lynch, president of Strategic Energy and Economic Research, a
consultancy. “It’s the long-term production profile that is suffering now, and
they will pay for it later.”
The auction on Wednesday was more notable for the companies that were absent
than for those that participated.
BHP Billiton dominated the bidding, and Anadarko Petroleum and BP picked up a
few blocks. But ExxonMobil, Shell Oil and Chevron — giants that lead in the
region — did not bother to participate at a time when they are focusing on
cutting costs and are struggling to save cash to protect their dividends.
“This sale reflects today’s market conditions,” said Abigail Ross Hopper,
director of the Department of Interior’s Bureau of Ocean Energy Management. “The
continuing drop in oil prices and low natural gas prices obviously affect
industry’s short-term investment decisions, but the gulf’s long-term value to
the nation remains high.”
Offshore drilling, particularly in deep waters, is some of the most expensive
exploration done by oil companies around the world. Nevertheless, since the 2010
BP Deepwater Horizon disaster that left 11 workers dead and soiled hundreds of
miles of beaches, and the one-year drilling moratorium that followed, production
in the gulf has flourished.
The Energy Department on Wednesday noted that with a total of 13 production
projects coming on line this year and next, output in the gulf would increase
from an average of 1.4 million barrels a day in the fourth quarter of 2014 to
1.6 million barrels a day in late 2016. That surge will partly offset an
expected decline in onshore production because oil companies have reduced their
rig count on land by more than 60 percent since last year.
The Energy Department, in its short-term energy outlook, projected a domestic
production increase from an average of 8.7 million barrels a day last year to
9.4 million barrels a day in 2015 before overall output declines to nine million
barrels next year. The resilient production in the United States, with rising
production from Iraq and Saudi Arabia, has produced a surplus of oil around the
globe of an estimated two million barrels a day.
One outgrowth of that surplus is the challenge of where to put all the oil.
Domestic storage alone rose 2.6 million barrels in mid-August, the report noted,
because of an unexpected surge in imports and a drop in refinery processing
after a breakdown in the BP refinery in Whiting, Ind.
Current crude stockpiles of 456 million barrels in the United States are at
levels rarely if ever seen at this time of year since World War II. Once the
summer driving season ends and other regional refineries begin their seasonal
retooling, the domestic glut of crude is likely to grow even larger and the
price of oil and gasoline will fall further, analysts said.
The Energy Department forecast that the American benchmark oil price would
average $49 a barrel this year, $6 lower than it estimated last month. It
forecast a price of $54 in 2016, $8 lower than it projected last month.
“Concerns over the pace of economic growth in emerging markets, continuing
(albeit slowing) supply growth, increases in global liquids inventories, and the
possibility of increasing volumes of Iranian crude entering the market
contributed to the changed forecast,” the department report said.
Offshore drilling has suffered from the overall oil market downdraft. Hercules
Offshore, a leading shallow-water gulf driller, filed for bankruptcy this month
and Fitch Ratings has suggested that more bankruptcies among offshore drillers
may be coming soon.
An oversupply of rigs is developing as contracts expire. Fitch recently
estimated in a report that day rates for ultra-deepwater rigs, which have
generally run between $400,00 to $600,000 in recent years, will come down to
$325,000.
“The market remains challenging, and we are in the midst of a significant
downturn in offshore drilling,” Anthony Kandylidis, executive vice president of
Ocean Rig, a leading drilling contractor, told analysts this month as he
announced the suspension of the company’s dividend. “The recent volatility in
the price of oil and increased availability of drilling units do not allow for a
short-term market improvement.”
Only five companies submitted 33 bids for 33 blocks spanning 190,000 acres of
gulf waters in Wednesday’s auction, representing a sharp decline that reflects a
growing consensus in the industry that the oil price is not going to recover
anytime soon.
Never before in history has the U.S. had so much oil spurting up
out of the ground and sloshing into storage tanks around the country. There's so
much oil that the U.S. now rivals Saudi Arabia as the world's largest producer.
But there's been some concern that the U.S. will run out of places to put it
all. Some analysts speculate that could spark another dramatic crash in oil
prices.
Everyone in the oil trading business needs information. One thing they want to
know these days is how full are oil storage tanks in places like Cushing, Okla.
To find out, ask a professional — someone with eyes on the ground, and in the
sky.
Genscape, an oil intelligence service, uses planes, helicopters and satellites
to track where and how much oil there is all over the world. The company "does a
James Bond approach and flies over the storage field twice a week," says Hillary
Stevenson, a manager at the firm.
In the U.S., you can tell how full some oil tanks are by flying over them and
looking down. Others require a little more sleuthing, "by using IR or infrared
technology cameras and flying over the tanks," Stevenson says.
In Cushing, there are fields of giant storage tanks, some the size of high
school football stadiums. Genscape estimates they're about 70 percent full. As
the storage tanks get closer to capacity, some analysts say that will drive
prices lower.
Nobody knows that for certain and there are lots of scenarios. But as space gets
tight, it gets increasingly more expensive to store oil. That should discourage
speculators from buying oil and storing it, hoping to sell it later for a
profit. If fewer speculators are buying, that means there's less demand and
prices fall.
"We're running out of storage capacity in the U.S.," Ed Morse, global head of
commodities research at Citigroup, said at an event recently in New York. "And
we're seeing the indication of the U.S. reaching tank tops. It's hard to know
where the price goes down, but it does go down."
The price of oil has already fallen from $100 a barrel last summer to $45 or $50
lately. Morse said lack of storage space could drive oil down to around $20 a
barrel.
But there's plenty of disagreement about that. Brian Busch, the director of oil
markets at Genscape, says oil prices could fall, but not that much.
"If we saw crude oil that was trading [in the $30 range], $38-$35, that would
not surprise me," he says.
But Busch says no one truly knows. The recent fighting in Yemen pushed prices
higher. If China's economy started growing faster, that could raise prices. But
an Iran nuclear deal might push oil prices down.
Putting those other factors aside, many experts doubt that the U.S. will get
that close to running out of storage space.
Rob Merriam, who tracks oil supplies for the Energy Information Administration,
says some of the current oil glut is seasonal.
"The analogy I would make is if you were in Boston and you look at the last 3
months and say, 'Oh my gosh, we're going to have two feet of snow every month,'
" he says. "If you took that same straight-line projection, you would say by the
end of August we're going to be under 15 feet of snow."
Just like snow melts as the temperature rises, demand for oil rises in the
summer. People drive their cars more, more refineries are up and running and
Merriam expects that those big storage tanks will get less full.
As far as what all this means for gasoline prices, the EIA estimates prices will
stay flat through this summer. That's still more than a dollar cheaper than last
year.
LONDON — Just as the oil market appeared to be stabilizing, the
price of crude resumed its descent on Friday.
The drop, of about 4 percent, came after a report from the International Energy
Agency warning that oil pouring into tank farms in the United States might “soon
test storage capacity limits.”
The agency, whose reports are closely monitored by oil traders, said that
overflowing storage “would inevitably lead to renewed price weakness.” American
production of oil continues to increase despite recently announced cutbacks in
new drilling by producers.
The price of West Texas Intermediate, the American benchmark, fell to around $45
a barrel on Friday, while Brent, the international benchmark, fell below $55 a
barrel.
The Department of Energy has proposed adding five million barrels of oil to the
Strategic Petroleum Reserve. The purchase, which requires congressional
approval, would be added in June and July. But 9.4 million barrels of oil a day
are being produced in the United States. Kevin Book, an analyst with ClearView
Energy Partners, said that the proposed purchase was not an attempt to support
falling prices but instead “appears to derive from a statutory obligation.”
Richard Mallinson, an analyst at Energy Aspects, a London-based research firm,
said that with winter coming to an end in much of the world, the oil market was
most likely due for a spell of softness. Refineries in Europe and Asia will now
be undergoing routine maintenance, leading to a period of weaker demand for
crude. “We are expecting another period of weakness,” Mr. Mallinson said in an
interview.
Additionally, striking refinery workers in the United States reached a tentative
deal this week to end their walkout. Although the walkout affected 12
refineries, it had minimal impact on production as managers and other workers
kept the plants running.
While prices rose to more than $60 a barrel for Brent recently, the fundamentals
in the market had not changed greatly since oil prices hit multiyear lows in the
early part of this year, the agency said in its report. The supply of oil from
the United States, which has increased production by more than four million
barrels a day since 2009 — more than the total output of either Iraq or Iran —
shows little sign of slowing down, the agency said.
At the same time, Russian exports have been rising, and Saudi Arabia, the third
of the world oil production leaders, increased output slightly in January and
February.
The Saudis under King Salman, who succeeded his brother Abdullah in January, are
not showing any signs of readiness to abandon their policy of maintaining
production and defending their share of the market regardless of the
consequences for prices.
Those low prices have helped lift demand for oil to higher levels than
forecasters expected in places like India, Brazil and Indonesia. Even China,
whose economy is widely reported to be slowing, is still lapping up lots of
crude. Overall demand, which is up more than a million barrels per day over last
year, according to Energy Aspects, has trimmed expected inventory builds outside
of the United States.
Stronger-than-expected global demand helps explain the wider-than-usual gap in
pricing between Brent, which is used as a reference in much of the globe, and
W.T.I. With operators in the United States largely barred from exporting crude,
the surplus barrels have nowhere to go, and inventories have risen to near
record levels.
The price snapback did not materialize out of thin air. It was aided by the
frigid weather in the Northeast United States, which raised demand for heating
oil, and other factors like flows into commodity investment funds.
Still, seasoned traders were taken by surprise by the roughly 30 percent rise in
Brent prices to over $60 a barrel since the six-year lows in January. When oil
was scraping bottom, for instance, trading companies like Trafigura Beheer
booked fleets of tankers to use as storage to take advantage of the steep spread
between current prices for crude and those further out. With current prices
having risen sharply, the trading companies have returned most of those ships to
normal duties.
But now the mood is turning. “These props to the market are now starting to
buckle,” analysts at Citigroup wrote in a recent note to clients. If the United
States and other global powers manage to reach a deal with Iran over its nuclear
program, for instance, that could clear the way for a big surge in Iranian
production.
Iraqi production, which was disrupted by weather in February, has also come
back. Exports from Gulf Arab states like the United Arab Emirates and Kuwait are
also running strong, analysts say, aided by aggressive discounting of their
crude.
“There is so much oil out there, and it looks like it is going to build up some
more,” said Michael Lynch, president of Strategic Energy and Economic Research,
a market analysis firm.
Clifford Krauss contributed reporting from Houston.
A version of this article appears in print on March 14, 2015, on page B3 of the
New York edition with the headline: Oil Prices Drop as Production Hums Along
Despite a Brimming Supply.
THE drastic rise in the price of oil and gasoline is in part the result of
forces beyond our control: as high-growth countries like China and India
increase the demand for petroleum, the price will go up.
But there are factors contributing to the high price of oil that we can do
something about. Chief among them is the effect of “pure” speculators —
investors who buy and sell oil futures but never take physical possession of
actual barrels of oil. These middlemen add little value and lots of cost as they
bid up the price of oil in pursuit of financial gain. They should be banned from
the world’s commodity exchanges, which could drive down the price of oil by as
much as 40 percent and the price of gasoline by as much as $1 a gallon.
Today, speculators dominate the trading of oil futures. According to
Congressional testimony by the commodities specialist Michael W. Masters in
2009, the oil futures markets routinely trade more than one billion barrels of
oil per day. Given that the entire world produces only around 85 million actual
“wet” barrels a day, this means that more than 90 percent of trading involves
speculators’ exchanging “paper” barrels with one another.
Because of speculation, today’s oil prices of about $100 a barrel have become
disconnected from the costs of extraction, which average $11 a barrel worldwide.
Pure speculators account for as much as 40 percent of that high price, according
to testimony that Rex Tillerson, the chief executive of ExxonMobil, gave to
Congress last year. That estimate is bolstered by a recent report from the
Federal Reserve Bank of St. Louis.
Many economists contend that speculation on oil futures is a good thing, because
it increases liquidity and better distributes risk, allowing refiners,
producers, wholesalers and consumers (like airlines) to “hedge” their positions
more efficiently, protecting themselves against unseen future shifts in the
price of oil.
But it’s one thing to have a trading system in which oil industry players place
strategic bets on where prices will be months into the future; it’s another
thing to have a system in which hedge funds and bankers pump billions of purely
speculative dollars into commodity exchanges, chasing a limited number of
barrels and driving up the price. The same concern explains why the United
States government placed limits on pure speculators in grain exchanges after
repeated manipulations of crop prices during the Great Depression.
The market for oil futures differs from the markets for other commodities in the
sheer size and scope of trading and in the impact it has on a strategically
important resource. There is a fundamental difference between oil futures and,
say, orange juice futures. If orange juice gets too pricey (perhaps because of a
speculative bubble), we can easily switch to apple juice. The same does not hold
with oil. Higher oil prices act like a choke-chain on the economy, dragging down
profits for ordinary businesses and depressing investment.
When I started buying and selling oil more than 30 years ago for my nonprofit
organization, speculation wasn’t a significant aspect of the industry. But in
1991, just a few years after oil futures began trading on the New York
Mercantile Exchange, Goldman Sachs made an argument to the Commodity Futures
Trading Commission that Wall Street dealers who put down big bets on oil should
be considered legitimate hedgers and granted an exemption from regulatory limits
on their trades.
The commission granted an exemption that ultimately allowed Goldman Sachs to
process billions of dollars in speculative oil trades. Other exemptions
followed. By 2008, eight investment banks accounted for 32 percent of the total
oil futures market. According to a recent analysis by McClatchy, only about 30
percent of oil futures traders are actual oil industry participants.
Congress was jolted into action when it learned of the full extent of Commodity
Futures Trading Commission’s lax oversight. In the wake of the economic crisis,
the Dodd-Frank Wall Street reform law required greater trading transparency and
limited speculators who lacked a legitimate business-hedging purpose to
positions of no greater than 25 percent of the futures market.
This is an important step, but limiting speculators in the oil markets doesn’t
go far enough. Even with the restrictions currently in place, those eight
investment banks alone can severely inflate the price of oil. Federal
legislation should bar pure oil speculators entirely from commodity exchanges in
the United States. And the United States should use its clout to get European
and Asian markets to follow its lead, chasing oil speculators from the world’s
commodity markets.
Eliminating pure speculation on oil futures is a question of fairness. The
choice is between a world of hedge-fund traders who make enormous amounts of
money at the expense of people who need to drive their cars and heat their
homes, and a world where the fundamentals of life — food, housing, health care,
education and energy — remain affordable for all.
President Obama and the Senate Democrats have again fallen
short in their quest to eliminate billions of dollars in unnecessary tax breaks
for an oil industry that is rolling in enormous profits. A big reason for that
failure is that some of those profits are being continuously recycled to win the
support of pliable legislators, underwrite misleading advertising campaigns and
advance an energy policy defined solely by more oil and gas production.
Despite pleading by Mr. Obama, the Senate on Thursday could not produce the 60
votes necessary to pass a bill eliminating $2.5 billion a year of these
subsidies. This is a minuscule amount for an industry whose top three companies
in the United States alone earned more than $80 billion in profits last year.
Nevertheless, in the days leading up to the vote, the American Petroleum
Institute spent several million dollars on an ad campaign calling the bill
“another bad idea from Washington — higher taxes that could lead to higher
prices.”
Studies by the Congressional Research Service, among others, say that ending
these tax breaks would increase prices by a penny or two a gallon. Yet all but
two Senate Republicans have been conditioned by years of industry largess to
accept its propaganda. In the last year, the industry spent more than $146
million lobbying Congress. In Thursday’s vote, senators who voted to preserve
the tax breaks received more than four times as much as those who voted against.
Money has always talked in Congress. Now industry allies are aiming at voters.
The American Energy Alliance, a Washington-based group that does not disclose
its financial sources, on Thursday began an ad campaign in eight states with
competitive Congressional races.
Voters in Michigan, Virginia, Florida, Ohio, Iowa, Nevada, New Mexico and
Colorado will hear a 30-second spot peddling the industry’s misleading arguments
against the Obama administration’s energy policies — including the fiction that
those policies have led to higher gas prices: “Since Obama became president,” it
says in part, “gas prices have nearly doubled. Obama opposed exploring for
energy in Alaska. He gave millions of dollars to Solyndra, which then went
bankrupt. And he blocked the Keystone pipeline, so we will all pay more at the
pump.”
Four sentences, four misrepresentations. Gas prices, tied to the world market,
would have gone up no matter who was president. Mr. Obama has not ruled out
further leasing in Alaskan waters. Solyndra, a solar panel maker, is the only
big failure in a broader program aimed at encouraging nascent energy
technologies. The Keystone XL oil pipeline has nothing to do with gas prices now
and, even if built, would have only a marginal effect.
The message war has really just begun. The oil industry has the money, but Mr.
Obama has a formidable megaphone. He must continue to use it.
WASHINGTON — After careful analysis of oil prices and months
of negotiations, President Obama on Friday determined that there was sufficient
oil in world markets to allow countries to significantly reduce their Iranian
imports, clearing the way for Washington to impose severe new sanctions intended
to slash Iran’s oil revenue and press Tehran to abandon its nuclear ambitions.
The White House announcement comes after months of back-channel talks to prepare
the global energy market to cut Iran out — but without raising the price of oil,
which would benefit Iran and harm the economies of the United States and Europe.
Since the sanctions became law in December, administration officials have
encouraged oil exporters with spare capacity, particularly Saudi Arabia, to
increase their production. They have discussed with Britain and France releasing
their oil reserves in the event of a supply disruption.
And they have conducted a high-level campaign of shuttle diplomacy to try to
persuade other countries, like China, Japan and South Korea, to buy less oil and
demand discounts from Iran, in compliance with the sanctions.
The goal is to sap the Iranian government of oil revenue that might go to
finance the country’s nuclear program. Already, the pending sanctions have led
to a decrease in oil exports and a sharp decline in the value of the country’s
currency, the rial, against the dollar and euro.
Administration officials described the Saudis as willing and eager, at least
since talks started last fall, to undercut the Iranians.
One senior official who had met with the Saudi leadership, said: “There was no
resistance. They are more worried about a nuclear Iran than the Israelis are.”
Still officials said, the administration wanted to be sure that the Saudis were
not talking a bigger game than they could deliver. The Saudis received a parade
of visitors, including some from the Energy Department, to make the case that
they had the technical capacity to pump out significantly more oil.
But some American officials remain skeptical. That is one reason Mr. Obama left
open the option of reviewing this decision every few months. “We won’t know what
the Saudis can do until we test it, and we’re about to,” the official said.
Worldwide demand for oil was another critical element of the equation that led
to the White House decision on sanctions. Now, projections for demand are lower
than expected because of the combination of rising oil prices, the European
financial crisis and a modest slowdown in growth in China.
As one official said, “No one wants to wish for slowdown, but demand may be the
most important factor.”
Nonetheless, the sanctions pose a serious challenge for the United States.
Already, concerns over a confrontation with Iran and the loss of its oil — Iran
was the third-biggest exporter of crude in 2010 — have driven oil prices up
about 20 percent this year.
A gallon of gas currently costs $3.92, on average, up from about $3.20 a gallon
in December. The rising prices have weighed on economic confidence and cut into
household budgets, a concern for an Obama administration seeking re-election.
On Friday afternoon, oil prices on commodity markets closed at $103.02 a barrel,
up 24 cents for the day.
Moreover, the new sanctions — which effectively force countries to choose
between doing business with the United States and buying oil from Iran —
threaten to fray diplomatic relationships with close allies that buy some of
their crude from Tehran, like South Korea.
But in a conference call with reporters, senior administration officials said
they were confident that they could put the sanctions in effect without damaging
the global economy.
Iran currently exports about 2.2 million barrels of crude oil a day, according
to the economic analysis company IHS Global Insight, and other oil producers
will look to make up much of that capacity, as countries buy less and less oil
from Iran. A number of countries are producing more petroleum, including the
United States itself, which should help to make up the gap.
Most notably, Saudi Arabia, the world’s single biggest producer, has promised to
pump more oil to bring prices down.
“There is no rational reason why oil prices are continuing to remain at these
high levels,” the Saudi oil minister, Ali Naimi, wrote in an opinion article in
The Financial Times this week. “I hope by speaking out on the issue that our
intentions — and capabilities — are clear,” he said. “We want to see stronger
European growth and realize that reasonable crude oil prices are key to this.”
By certifying that there is enough supply available, the administration is also
trying to gain some leverage over Iran before a resumption of negotiations,
expected on April 14.
The suggestion that Saudi Arabia is prepared to make up for any lost Iranian
production is intended to remove Iran’s ability to threaten a major disruption
in the world oil supply if it does not cede to Western and United Nations
demands to halt uranium enrichment.
However, administration officials concede that it is unclear how the oil markets
will react to Iranian threats even with the president’s latest certification
that there is sufficient oil to fill the gap. “We just don’t know how much
negotiating advantage we have gained,” said one senior administration official
who has been involved in developing the policy.
In a statement, Jay Carney, the White House press secretary, said the
administration acknowledged that the oil market had become increasingly tight,
with output just besting demand.
“Nonetheless, there currently appears to be sufficient supply of non-Iranian oil
to permit foreign countries” to cut imports, he said.
American officials have also discussed a coordinated release of oil from the
national strategic reserves with French and British officials.
Some energy experts question whether Saudi Arabia really has enough spare
capacity to make up for the loss of Iran’s oil. But the determination of the
United States and Europe to combat high prices might be enough to quiet the
markets.
The White House “can have a very limited material impact on the size of
supplies,” said David J. Rothkopf, the president of Garten Rothkopf, a
Washington-based consultancy. “But they can have a much larger impact on
perceptions. In this case, it’s not so much the producers as the energy traders
who are moving market prices — and that’s where the White House wants to play a
role.”
Additionally, the White House has the ability under the law to waive the new
sanctions if they threaten national security or if oil prices spurt, increasing
the flow of money to Iran’s government.
Helene Cooper contributed reporting from Burlington, Vt.,
and David E. Sanger from Cambridge, Mass.
This article has been revised to reflect the following correction:
Correction: March 30, 2012
An earlier version of this article erroneously included Japan
January 4,
2012
The New York Times
By CLIFFORD KRAUSS
HOUSTON —
If Iran were to follow through with its threat to blockade the Strait of Hormuz,
a vital transit route for almost one-fifth of the oil traded globally, the
impact would be immediate: Energy analysts say the price of oil would start to
soar and could rise 50 percent or more within days.
An Iranian blockade by means of mining, airstrikes or sabotage is logistically
well within Tehran’s military capabilities. But despite rising tensions with the
West, including a tentative ban on European imports of Iranian oil announced
Wednesday, Iran is unlikely to take such hostile action, according to most
Middle East political experts.
United States officials say the Navy’s Fifth Fleet, based in nearby Bahrain,
stands ready to defend the shipping route and, if necessary, retaliate
militarily against Iran.
Iran’s own shaky economy relies on exporting at least two million barrels of oil
a day through the strait, which is the only sea route from the Persian Gulf and
“the world’s most important oil choke point,” according to Energy Department
analysts.
A blockade would also punish China, Iran’s most important oil customer and a
major recipient of Persian Gulf oil. China has invested heavily in Iranian oil
fields and has opposed Western efforts to sanction Iran over its nuclear
program.
Despite such deterrents to armed confrontation, oil and foreign policy analysts
say a miscalculation is possible that could cause an overreaction from one side
or the other.
“I fear we may be blundering toward a crisis nobody wants,” said Helima Croft,
senior geopolitical strategist at Barclays Capital. “There is a peril of
engaging in brinksmanship from all sides.”
Various Iranian officials in recent weeks have said they would blockade the
strait, which is only 21 miles wide at its narrowest point, if the United States
and Europe imposed a tight oil embargo on their country in an effort to thwart
its development of nuclear weapons.
That did not stop President Obama from signing legislation last weekend imposing
sanctions against Iran’s Central Bank intended to make it more difficult for the
country to sell its oil, nor did it dissuade the European Union from moving
toward a ban on Iranian oil imports.
Energy analysts say even a partial blockage of the Strait of Hormuz could raise
the world price of oil within days by $50 a barrel or more, and that would
quickly push the price of a gallon of regular gasoline to well over $4 a gallon.
“You would get an international reaction that would not only be high, but
irrationally high,” said Lawrence J. Goldstein, a director of the Energy Policy
Research Foundation.
Just the threat of such a development has helped keep oil prices above $100 a
barrel in recent weeks despite a return of Libyan oil to world markets, worries
of a European economic downturn and weakening American gasoline demand. Oil
prices rose slightly on Wednesday as the political tensions intensified.
American officials have warned Iran against violating international laws that
protect commercial shipping in international waters, adding that the Navy would
guarantee free sea traffic.
“If the Iranians chose to use their modest navy and antiship missiles to attack
allied forces, they would see a probable swift devastation of their naval
capability,” said David L. Goldwyn, former State Department coordinator for
international energy affairs. “We would take out their frigates.”
More than 85 percent of the oil and most of the natural gas that flows through
the strait goes to China, Japan, India, South Korea and other Asian nations. But
a blockade would have a ripple effect on global oil prices.
Since Iraq, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates all rely on
the strait to ship their oil and natural gas exports, a blockade might undermine
some of those governments in an already unstable region.
Analysts say that a crisis over the Strait of Hormuz would most likely bring
China and the United States into something of an alliance to restore shipments,
although Mr. Goldwyn said China would more likely resort to private diplomacy
instead of military force.
Europe and the United States would probably feel the least direct impact because
they have strategic oil reserves and could get some Persian Gulf oil through Red
Sea pipelines. Saudi Arabia has pipelines that could transport about five
million barrels out of the region, while Iraq and the United Arab Emirates also
have pipelines with large capacities.
But transportation costs would be higher if the strait were blocked, and several
million barrels of oil exports would remain stranded, sending energy prices
soaring on global markets.
“To close the Strait of Hormuz would be an act of war against the whole world,”
said Sadad Ibrahim Al-Husseini, former head of exploration and development at
Saudi Aramco. “You just can’t play with the global economy and assume that
nobody is going to react.”
The Iranians have struck in the strait before. In the 1980s, Iran attacked
Kuwaiti tankers carrying Iraqi oil, and the Reagan administration reflagged
Kuwaiti ships under American flags and escorted them with American warships.
Iran backed down, partially, but continued to plant mines.
In 1988, an American frigate hit an Iranian mine and nearly sank. United States
warships retaliated by destroying some Iranian oil platforms. Attacks and
counterattacks continued for months, and a missile from an American warship
accidentally shot down an Iranian passenger aircraft, killing 290 passengers.
Energy experts say a crisis in the strait would most likely unfold gradually,
with Iran using its threats as a way to increase oil prices and shipping costs
for the West as retaliation against the tightening of sanctions. So far, energy
experts say, insurance companies have not raised prices for covering tankers,
but shipping companies are already preparing to pay bonuses for crews facing
more hazardous duties.
“My guess is this is a lot of threats,” said Michael A. Levi, an energy expert
at the Council on Foreign Relations, “but there is no certainty in this kind of
situation.”
December
28, 2011
The New York Times
By DIANE CARDWELL and RICK GLADSTONE
The
United States economy managed to cope this year despite triple-digit prices for
barrels of oil. The lessons may come in handy, economists say, because those
prices will probably be sticking around.
With Iran threatening to cut off about a fifth of the world’s oil supply by
closing the Strait of Hormuz and unrest in Iraq endangering the ability to
increase production there, financial analysts say prices for two important oil
benchmarks will average from $100 a barrel to $120 a barrel in 2012.
For consumers, who have been driving less and buying more fuel-efficient cars,
weakened demand has helped lower gasoline prices 70 cents since May, to a
national average of $3.24 for a gallon of regular unleaded, according to the AAA
Fuel Gauge Report.
Now, though, the focus has turned to Iran. On Wednesday, Iran and the United
States sharpened their tone over Iran’s vow to close the Strait of Hormuz if
Western powers tried to stifle Iran’s petroleum exports.
The catalyst for the Iranian threats are new efforts by the United States and
the European Union to pressure Iran into ending its nuclear program, which Iran
has refused to do despite four rounds of sanctions imposed by the United Nations
Security Council.
Those sanctions have not focused on Iran’s oil exports. But in recent weeks, the
European Union has talked openly of imposing a boycott on Iranian oil, and
President Obama is preparing to sign legislation that, if fully enforced, could
impose harsh penalties on all buyers of Iran’s oil, with the aim of severely
impeding Iran’s ability to sell it.
Rear Adm. Habibollah Sayyari, Iran’s naval commander, said in remarks carried by
an official Iranian new site that “closing the Strait of Hormuz is very easy for
Iranian naval forces.” Admiral Sayyari, whose forces were in the midst of
ambitious war game exercises in waters near the Strait of Hormuz, was the second
top Iranian official to make such a threat in 24 hours.
A spokeswoman for the United States Navy’s Fifth Fleet, which is based in
Bahrain and patrols the strait, responded: “Anyone who threatens to disrupt
freedom of navigation in an international strait is clearly outside the
community of nations; any disruption will not be tolerated.”
The Strait of Hormuz, with two mile-wide channels for commercial shipping,
connects the Gulf of Oman to the Persian Gulf, the principal loading point for
oil shipped from Saudi Arabia, the world’s largest oil exporter.
A Saudi official told The Associated Press that the other oil-producing gulf
nations are prepared to fill any shortfall in Iranian oil supply. But just as
unrest in Libya shook the oil market in 2011, concern over Iran could influence
prices in 2012.
Markets seemed to shrug off Iran’s threats. The price of the benchmark crude oil
contract on the New York Mercantile Exchange fell for the first time in more
than week, settling at $99.36 on Wednesday, down $1.98.
But several investment banks predict that the price of the benchmark crude on
the New York exchange will average about $110 next year while Brent crude oil,
which analysts say affects what most of the world pays for oil, will average
about $115 a barrel.
“The possibility that there might be a disruption in oil supply at some time in
2012 as Iran retaliates has, I think, permanently embedded a $10 to $20 premium
in the price of oil,” said Bernard Baumohl, chief global economist at the
Economic Outlook Group. “The danger is if oil starts to move toward $130 a
barrel, or even higher, depending on whether that confrontation will escalate.
Then you’re really talking about the prospect of the U.S. tipping over into
recession in addition to Europe, and that the whole global economy will be
facing an economic downturn.”
Analysts say that members of the Organization of the Petroleum Exporting
Countries, including Iran and Saudi Arabia, have an incentive to keep prices
near $100 a barrel. Many governments in the Middle East and North Africa spent
heavily on social assistance programs in response to the unrest of the Arab
Spring and are depending on higher prices to help meet their budgets.
“It would be nice if prices did come down quite substantially,” said Francisco
Blanch, head of commodity strategy at Bank of America Merrill Lynch, who added
that the chances were slim. “The idea that oil is going to stay high for a while
is pretty well entrenched because this is a premium fuel in the world economy,
there isn’t a lot of oil out there and whatever oil is available is pretty much
off bounds.”
Economists say they expect prices to remain high despite the relative weaknesses
of the American and European economies because global demand for oil —
especially diesel — is escalating and outstripping supply.
“There’s a consensus view that high prices will persist through 2012 because of
the premise that the rest of the world, the emerging economies, are using a lot
more fuel,” said Tom Kloza, chief oil analyst at the Oil Price Information
Service.
At the same time, there is uncertainty in the forecasts, with some analysts
predicting that prices could end up much lower as production increases in Libya
and North America and could even drop sharply if the European economy falls
apart. The United States Energy Information Administration, for instance,
estimated this month that the price of the benchmark West Texas Intermediate,
often called W.T.I., could fall as low as $49 a barrel or rise as high as $192
by the end of next year.
Sustained triple-digit oil prices could threaten the United States recovery,
costing jobs, raising the prices of food and other consumer goods and pushing a
gallon of gasoline to $5 or more. By one estimate, a $10 increase in the price
of a barrel of oil shaves 0.2 to 0.3 percentage points off the economy’s annual
growth rate.
Early this year, when W.T.I. crude oil finally reached $100 a barrel — the
highest it had been in more than two years — the economy proved more resilient
than in 2008, when crude crossed $100 a barrel and the country was mired in
recession.
This spring, oil prices peaked at about $114 a barrel and then fell, stabilizing
well below many predictions — in part because the Arab Spring did not stop oil
from flowing out of the Middle East to the extent that had been anticipated. Gas
prices have been declining since May and gross domestic product, while still
sluggish, grew throughout the year, according to the most recent Commerce
Department estimates.
Before 2008, gas prices had mainly stayed below $3 a gallon, and Americans were
less focused on fuel economy, buying larger cars including S.U.V.’s. But after
the price shock, when oil soared to $145 a barrel and average gas prices topped
$4, many of those habits changed. Since then, gas prices have remained volatile,
rising sharply toward the end of 2010 and the early part of this year before
beginning to decline.
New figures from the Federal Highway Administration show that Americans cut back
on their driving again in October. They logged 2.3 percent less, or 254 billion
miles, compared with October a year ago, the eighth consecutive month there has
been a decline. A broader measure — the 12-month total of miles driven — shows
that motorists fell back to the low of 2.963 trillion miles driven reached at
the end of the recession in 2009.
“It’s not just, I don’t have enough money, I don’t want to go out and buy gas,”
said John Gamel, a macroeconomic analyst at MasterCard Advisors SpendingPulse.
“It’s, I have found ways not to have to buy gas and so I’m going to keep doing
that.”
He added that Americans had been doing less discretionary driving because they
still perceived gas prices as being high. “Consumers have this belief that
prices will either go up or they will remain at elevated levels.”
September 20,
2011
The New York Times
By ROBERT C. McFARLANE
and R. JAMES WOOLSEY
OUR country
has just gone through a sober national retrospective on the 9/11 attacks. Apart
from the heartfelt honoring of those lost — on that day and since — what seemed
most striking is our seeming passivity and indifference toward the well from
which our enemies draw their political strength and financial power: the
strategic importance of oil, which provides the wherewithal for a generational
war against us, as we mutter diplomatic niceties.
Oil’s strategic importance stems from its virtual monopoly as a transportation
fuel. Today, 97 percent of all air, sea and land transportation systems in the
United States have only one option: petroleum-based products. For more than 35
years we have engaged in self-delusion, saying either that we have reserves here
at home large enough to meet our needs, or that the OPEC cartel will keep prices
affordable out of self-interest. Neither assumption has proved valid. While the
Western Hemisphere’s reserves are substantial and growing, they pale in the face
of OPEC’s, which are substantial enough to effectively determine global supply
and thus the global price.
According to senior executives in the oil industry, in the years ahead that
price is going to rise beyond anything we’ve seen — well above the $147 per
barrel we experienced three years ago. Such a run-up in the price of oil has
been predicted as a consequence of an event like an attack on a major Saudi
processing facility that takes production off line. But such a spike would be
more likely to be caused by the predictable increase of demand in China, India
and developing countries, alongside the cartel’s strategy of driving up prices
by constraining supply. While OPEC sits on 79 percent of the world’s
conventional oil reserves, it accounts for only one-third of global oil supply.
There is, however, a way out of this crisis. Ultimately, electric cars may
become the norm, but for the near and middle term, the solution lies in opening
the transportation fuel market to competition from sources other than petroleum.
American oil companies have come around to understanding the wisdom of
introducing competition, as a matter of their own self-interest. But doing so
means rapidly ramping up production of the alternative fuels, and that is the
challenge. As an example, before investors will expand production capacity for
cellulosic ethanol from plant life, or for methanol from natural gas — which on
a per-mile basis is significantly cheaper than gasoline — they want to see that
a sufficient proportion of the cars and trucks on America’s roads can burn these
fuels.
Here too, however, a solution is at hand; it lies in Detroit’s making more
flex-fuel cars — cars able to use gasoline, ethanol, methanol or any mixture of
these. And because this flex-fuel option costs less than $100 per car, making
such a change is not exorbitant. Indeed, some 90 percent of all cars sold in
Brazil last year are flex-fuel cars, and many of them were made by Ford,
Chrysler and General Motors. That gives Brazilian drivers the option to purchase
the most cost-effective fuel, and they can easily switch from one type to
another.
But here’s the rub. Although the American manufacturers have stated publicly
their willingness to make flex-fuel vehicles up to 50 percent of their
production, they’re just not doing it. Hence the need for Congress to require
that new vehicles allow the use of alternative fuels. In some corners of
Washington, that raises a cry against “mandates.” Of course the response to that
is: Doing nothing is equivalent to mandating a monopoly by a single fuel (whose
price is set by a foreign cartel).
Competition is a bedrock of our American way of life. It’s time to introduce it
into our fuel market.
That is the purpose of the United States Energy Security Council, a bipartisan
group being introduced to the public today in Washington, which includes former
Secretary of State George P. Shultz and two former secretaries of defense,
William J. Perry and Harold Brown, as well as three former national security
advisers, a former C.I.A. director, two former senators, a Nobel laureate, a
former Federal Reserve chairman, and several Fortune-50 chief executives
(including a former president of Shell Oil North America, John D. Hofmeister).
The time has come to strip oil of its strategic status. We owe it to those who
lost their lives on 9/11 and in its aftermath, and to those whose fate still
hangs in the balance.
Robert C.
McFarlane was the national security adviser from 1983 to 1985. R. James Woolsey,
chairman of the Foundation for Defense of Democracies, was the director of the
Central Intelligence Agency from 1993 to 1995.
LONDON | Thu Feb 24, 2011
8:11am EST
Reuters
By Jeremy Gaunt
LONDON (Reuters) - Soaring oil prices are reaching levels that could threaten
to brake improving but tentative global economic recovery, with an outside
chance of a new recession or that most destructive of conditions, stagflation.
If the price spike is sustained, it will soon add pressure on central banks
already worried about food prices to tighten monetary policy, a move that would
mop up some of the liquidity that fostered recovery in the first place.
It will also hit different regions and countries differently, depending on their
underlying economic strength and whether they are oil producers or importers.
Few policymakers or analysts are panicking yet. The spiking price of oil is
related to the turmoil in Libya and fears of a more widespread supply
disruption. It has nothing to do with wider economic fundamentals.
But the numbers are getting high enough to at least raise the prospect of big
trouble for the global economy.
Brent oil was around $115 a barrel on Thursday, hitting its highest level since
August 2008, and U.S. crude was above $100. They were driven by concern the
bloody unrest that has cut more than a quarter of OPEC-member Libya's output
could spread to other producers including Saudi Arabia.
The Brent contract flirted with $120 a barrel in earlier trading, a level
Deutsche Bank says could be an inflection point for global economic growth.
"$120/barrel is the level that oil as a share of global GDP starts to move above
5.5 percent of GDP, which has historically been an environment where global
growth has come under pressure," the bank's analysts said in a note.
Technical analyses indicated that oil prices could smash through their 2008
highs to just below $160 a barrel this year, according to Reuters analyst Wang
Tao.
HOW LONG, HOW FAR
An oft-cited rule of thumb is that a $10 per barrel increase in the price of oil
knocks half a percentage point from global GDP growth.
By this standard, an oil-induced double-dip recession is a long way off. Brent
would have to reach around $190 a barrel for a return to negative growth from
current levels.
The rule is questionable -- the world economy boomed in the mid-noughties while
oil soared. The key is really the sustainability of a high price.
Charles Robertson, chief economist at Renaissance Capital, for example, reckons
that an average annual price of more than $150 a barrel would be akin to the
oil-price shock that hit after the Iranian revolution of 1979.
That pushed oil up to nearly 8 percent of GDP, way above the level at which it
starts battering global growth.
Robertson, however, says the world can handle short-lived spikes that only lift
the GDP impact to 5 percent.
Macquarie economists, meanwhile, calculate that oil needs to be sustainably
above $120, closer to $140, before it starts having a major global impact.
For that to occur it would probably take more than just Libyan revolt. The fear
at the back of many investors' and economists' minds is an even wider breakdown
in stability across the Arab world, particularly if Saudi Arabia was dragged in.
The latest spike in prices, for example, was partly prompted by Goldman Sachs
saying that the market was reacting to fears of contagion to other producing
nations after Libya and that another disruption could create severe oil
shortages and require demand rationing.
All bets would be off if Saudi Arabia succumbed to serious popular revolt. The
top OPEC producer holds more than a fifth of world oil reserves.
Saudi King Abdullah returned home on Wednesday after a three-month medical
absence and unveiled benefits for Saudis worth some $37 billion in an apparent
bid to insulate the world's top oil exporter from an Arab protest wave.
INFLATION
Even if the price is relatively contained, however, any form of sustained rise
will feed into already rising inflationary pressures, threatening monetary
tightening and causing problems of different sorts across the world.
Fast-growing Asian economies such as China's are already struggling to deal with
higher food prices and to keep their economies from over-heating.
Deng Yusong, an economist at China's Development Research Center, a government
think tank, told the hexun.com financial news website that a higher oil price is
not a particular problem for Chinese consumer inflation.
But, looking closer at the heart of the Chinese economic dragon, he added: "The
impact of oil prices on the producer price index may be quite deep."
Elsewhere, higher oil prices are threatening to unwind some of the recovery
plays being carefully crafted by western officials.
Calls are already being heard for the British government to hold off on new
petrol taxes, an income stream that is part of a broader plan to kill off a
burgeoning fiscal deficit.
European Central Bank officials have also become increasingly hawkish about
inflation, despite weak growth in a number of non-core euro zone economies.
Higher prices, meanwhile, are unlikely to do anything positive for U.S.
employment, which continues to lag economic recovery elsewhere and directly
impacts all-important consumer sentiment.
It is the United States that may bear the heaviest inflationary brunt from an
oil shock in the developed world, according to analysis by at Fathom Consulting.
It calculates that oil at $120 would add about 0.5 percentage points to UK and
European inflation but more than 1.5 points to U.S. inflation because of greater
American consumption of oil and its lower energy taxes.
"An increase in oil prices then might still be a problem for all, but it is a
particular problem for the Fed, especially at this point in the 'recovery',"
said Fathom's Andrew Clare.
A repeat of the '70s oil crises, which saw prices spike, global economic growth
dampen and stagflation remains an extreme scenario. But it is not as obscure a
prospect as it was a few weeks ago
(Additional reporting by Mike Peacock and Don Durfee)
This article was reported by Sarah Lyall, Clifford Krauss
and Jad Mouawad and
written by Ms. Lyall.
Hurricane Dennis had already come and gone on July 11, 2005, when a passing
ship spotted a shocking sight in the Gulf of Mexico: Thunder Horse, BP’s hulking
$1 billion oil platform, was listing precariously to one side, looking for all
the world as if it were about to sink.
Towering 15 stories above the water’s surface, Thunder Horse was meant to be the
company’s crowning glory, the embodiment of its bold gamble to outpace its
competitors in finding and exploiting the vast reserves of oil beneath the
waters of the gulf.
Instead, the rig, which was supposed to produce about 20 percent of the gulf’s
oil output, became a symbol of BP’s hubris. A valve installed backward had
caused the vessel to flood during the hurricane, jeopardizing the project before
any oil had even been pumped. Other problems, discovered later, included a
welding job so shoddy that it left underwater pipelines brittle and full of
cracks.
“It could have been catastrophic,” said Gordon A. Aaker Jr., a senior
engineering consultant on the project. “You would have lost a lot of oil a mile
down before you would have even known. It could have been a helluva spill — much
like the Deepwater Horizon.”
The problems at Thunder Horse were not an anomaly, but a warning that BP was
taking too many risks and cutting corners in pursuit of growth and profits,
according to analysts, competitors and former employees. Despite a catalog of
crises and near misses in recent years, BP has been chronically unable or
unwilling to learn from its mistakes, an examination of its record shows.
“They were very arrogant and proud and in denial,” said Steve Arendt, a safety
specialist who assisted the panel appointed by BP to investigate the company’s
refineries after a deadly 2005 explosion at its Texas City, Tex., facility. “It
is possible they were fooled by their success.”
Indeed, there was a great deal of success to admire. In little more than a
decade, BP grew from a middleweight into the industry’s second-largest company,
behind only Exxon Mobil, with soaring profits, fat dividends and a share price
to match.
From its base in London, the company struck bold deals in politically volatile
areas like Angola and Azerbaijan and pushed technology to the limit in the
remotest reaches of Alaska and the deepest waters of the Gulf of Mexico — “the
tough stuff that others cannot or choose not to do,” as its chief executive,
Tony Hayward, once put it.
The company also led an industry wave of cost-cutting and consolidation. It took
over American competitors like Amoco and Atlantic Richfield and eliminated tens
of thousands of jobs in several rounds, streamlining management but forcing the
company to rely more heavily on outside contractors.
For a long time, BP’s strategy seemed to pay off. But on April 20, the nightmare
situation occurred: the Deepwater Horizon drilling rig exploded, killing 11
workers and sending millions of gallons of oil gushing from BP’s Macondo well
like so much black poison.
Although the accident is still under investigation, preliminary findings by
Congressional investigators indicate that BP made a series of decisions that
compounded the chances of disaster.
BP declined to make Mr. Hayward or other executives available for this article.
But in an interview last month, Robert Dudley, the BP board member now in charge
of the gulf spill response, denied that the accident reflected a corporate
disregard for safety.
“I think we will find that this was an incredibly complicated set of events with
individual decisions and equipment failures that led to a very complicated
industrial accident,” he said.
BP is hardly the only oil company that has taken on difficult projects with a
shaky safety net. But the company’s attitude toward risk stands in contrast to
that of its competitors, most notably Exxon Mobil, whose searing experience with
the Exxon Valdez spill in 1989 spurred a wholesale change in its approach to
safety.
“You can have the best intentions in the world, you can have the best equipment
in the world, but it’s a combination of intentions, equipment and judgment that
keeps accidents out of the workplace,” said Joseph H. Bryant, who ran BP’s
operations in Angola from 2000 to 2004 and who is now chief executive of Cobalt
International Energy. “If you are going to ask people to innovate, you’d better
make sure that they know that any risks they take are manageable.”
A Focus on the Basics
When Tony Hayward became BP’s chief executive in May 2007, he promised to get
the company back to basics.
One of his first moves was to remove the modern art adorning the company’s
swanky London headquarters, including an endless video of gently waving corn
projected onto one wall. In its place went prosaic photographs of BP service
stations, platforms and pipelines.
A plain-spoken geologist and longtime company man, Mr. Hayward dispensed with
the limousine used by his socially prominent predecessor, John Browne, and
closed the concierge desk in the lobby that had helped employees with dry
cleaning and theater tickets.
“BP makes its money by someone, somewhere, every day putting on boots,
coveralls, a hard hat and glasses, and going out and turning valves,” Mr.
Hayward said in a speech at Stanford Business School last year. “And we’d sort
of lost track of that.”
Mr. Hayward also pledged to fix the safety problems that contributed to the
downfall of his predecessor. Though the company would continue doing the “tough
stuff,” he declared, it would make safety its “No. 1 priority.”
In the realm of personal safety, Mr. Hayward expanded on Mr. Browne’s
initiatives. Visitors today see signs at company offices exhorting workers not
to walk and carry hot coffee at the same time, to stick to marked walkways in
parking lots and to grasp banisters while climbing the stairs. Employees with
company cars must take defensive driving courses.
Mr. Hayward also set up a new companywide management system to evaluate risks,
standardize safety practices and improve decision-making.
In a memorandum to employees on Friday, he noted that before Deepwater Horizon,
the company’s safety record had been improving. “This accident has been a
terrible exception to that trend and we must learn the lessons from it,” he
wrote. “But at the same time, it does not invalidate all the hard work you have
put in to improve our safety standards around the world. Safety is our first
priority. It will remain so.”
But American regulators and some members of Congress say that despite such talk,
the company continues its risky behavior.
“The way safety is measured is generally around worker injuries and days away
from work, and that measure of safety is irrelevant when you are looking at the
likelihood that a facility like an oil refinery could explode,” said David
Michaels, assistant secretary of labor for occupational safety and health. “This
is comparable to saying that an airline is safe because the pilots and mechanics
haven’t been injured.”
A Story Begun in Persia
BP was born in 1908 when a rich Englishman named William Knox D’Arcy struck oil
in Iran and formed the Anglo-Persian Oil Company. Treating the locals as little
more than imperial subjects, the company, partly owned by the British
government, expanded across the region, its fortunes intertwined with those of
the British Empire.
But as oil-rich countries around the world began nationalizing their oil fields,
British Petroleum, as it later became known, was forced to retreat and find new
strategies along with the rest of the industry.
In 1995, the British government sold the last of its stake in the company and
the charismatic Mr. Browne took over.
A highly visible supporter of the Royal Opera House, the National Gallery and
Prime Minister Tony Blair, Mr. Browne transformed the company into a global
behemoth, boldly acquiring properties around the world and rechristening it BP.
Unlike some of his more cautious competitors, Mr. Browne ignored small projects
and went after the riskiest, most expensive and potentially most lucrative
ventures — “elephants,” in industry jargon. Under him, BP’s share price more
than doubled and its cash dividend tripled, making it a darling of investors.
But even as he became the toast of Britain’s business world and was made a
knight and member of the House of Lords, Mr. Browne was ruthlessly slashing
costs. He outsourced many operations and fired tens of thousands of employees,
including many engineers.
Tom Kirchmaier, a lecturer in strategy at the Manchester Business School, said
that Mr. Browne tried to run BP like a financial company, rotating managers into
new jobs with tough profit targets and then moving them before they had to deal
with the consequences. The troubled Texas City refinery, for example, had five
managers in six years.
Mr. Browne, now advising Britain’s coalition government on its cost-cutting
campaign, declined to comment for this article. In his new autobiography,
“Beyond Business,” he said, “I transformed a company, challenged a sector, and
prompted political and business leaders to change.”
Mr. Browne resigned under pressure in 2007, his reputation tarnished by a lie he
told in court papers about his relationship with a male companion.
However, Mr. Browne’s fall from grace really began on March 23, 2005, when 15
people died and more than 170 were injured in America’s worst industrial
accident in a generation: a huge fire and explosion at Texas City.
A Troubled Workplace
Acquired by BP in the Amoco purchase, the Texas City plant was America’s
second-largest refinery, turning 460,000 barrels of crude oil a day into
gasoline. But the facility, built in 1934, was poorly maintained and long
starved of capital investment.
“We have never seen a site where the notion ‘I could die today’ was so real,”
the Telos Group, a consulting firm hired to examine conditions at the plant,
said in a report two months before the accident.
The explosion occurred when a 170-foot tower was being filled with liquid
hydrocarbons. Because of poor communication among several workers who had been
on 12-hour shifts for more than a month straight, no one noticed that the tower
was filled too high.
A 20-foot geyser of unstable chemicals shot into the sky, and the vapor ignited
when a contractor, trying to get away, repeatedly tried to start the engine on
his stalling pickup truck.
The subsequent investigations were scathing. The explosion was “caused by
organizational and safety deficiencies at all levels of BP,” the United States
Chemical Safety Board concluded in one report.
The government ultimately found more than 300 safety violations, and BP agreed
to pay a then record $21 million in fines.
A year later, there was a new calamity: 267,000 gallons of oil leaked from BP’s
network of pipelines in Prudhoe Bay, Alaska.
It was the worst spill ever on the North Slope, and once again, the cause was
preventable. Investigators found widespread corrosion in several miles of
under-maintained and poorly inspected pipes. BP eventually paid more than $20
million in fines and restitution.
While these two accidents drew most public attention, serious problems were also
brewing offshore, at BP’s Thunder Horse platform.
Mr. Aaker, the engineering consultant who worked on it, said BP’s bosses rushed
construction of the intricately designed vessel, moving it to the gulf before it
was ready to “demonstrate to their shareholders that the project was on time and
on schedule.”
Once the rig was at sea, several hundred people at a time frantically worked to
complete it, sleeping in cramped, chaotic conditions on board a temporary
encampment of ships.
“It was like having the plumbers, the electricians and the bricklayers come to a
construction site at the same time as they are laying the concrete,” said Mr.
Aaker, who is now assisting the House Energy and Commerce Committee in its
investigation of Deepwater Horizon. “This was not methodical.”
Nor was it safe.
The near sinking of Thunder Horse in 2005 was caused by a shockingly simple
mistake: a check valve had been installed backward, and that caused water to
flood into, rather than out of, the rig when it heated up during the hurricane.
After costly repairs to fix that damage, BP discovered a more significant
problem: rudimentary mistakes in the welding of pipes in the underwater
manifold, which connects dozens of wells and helps carry the oil back to the
platform, had caused dangerous cracks and breaks.
Had the well been active, the damaged pipes would have caused a major oil spill.
As it was, the company had to remotely rip out, retrieve and fix dozens of
complex and heavy pieces of equipment lying on the sea floor, some weighing more
than 400 tons.
Altogether, the blunders cost BP and its minority partner, Exxon Mobil, hundreds
of millions of dollars in repairs and set back production, today at 300,000
barrels of oil and oil equivalents a day, by three years.
Although the Deepwater Horizon accident involved an exploration rig, not a
production platform, a similar carelessness and disregard for safety was evident
in BP’s decisions there, according to preliminary findings by the House Energy
and Commerce Committee. “In effect, it appears that BP repeatedly chose risky
procedures in order to reduce costs and save time and made minimal efforts to
contain the added risk,” wrote Henry A. Waxman, the committee chairman, and Bart
Stupak, chairman of its subcommittee on oversight and investigations.
BP took a different sort of risk in Russia, forming a 50-50 joint venture in
2003 with that nation’s unpredictable oligarchs to gain access to the vast
resources beneath the Siberian taiga.
The deal, which accounted for about one-quarter of BP’s global oil reserves,
nearly collapsed in 2008, when the Russian government sought tighter control
over its energy sector. After a nasty public fight, BP was forced to hand over
operational control of the venture to its Russian partners, although it
continues to reap vast profits from it.
BP stepped into another tricky political situation last year, when Iraq offered
foreign companies $2 a barrel to help it increase production from its oil
fields, which had suffered from years of war and neglect. BP’s competitors
blanched at the low price, but Mr. Hayward teamed up with a Chinese state-owned
company and accepted the deal.
The chairman of a rival company was so enraged that he called Mr. Hayward and
demanded: “Tony, have you gone mad?” BP’s move forced other companies to agree
to similar terms. As one analyst noted, it was “disastrous to profitability” for
the industry.
Old Habits Die Hard
Time and again, BP has insisted that it has learned how to balance risk and
safety, efficiency and profit. Yet the evidence suggests that fundamental change
has been elusive.
Revisiting Texas City in 2009, inspectors from the Occupational Safety and
Health Administration found more than 700 safety violations and proposed a
record fine of $87.4 million — topping the earlier record set by BP in the 2005
accident. Most of the penalties, the agency said, were because BP had failed to
live up to the previous settlement fully.
In March of this year, OSHA found 62 violations at BP’s Ohio refinery, proposing
$3 million more in penalties.
“Senior management told us they are very serious about safety, but we observed
that they haven’t translated their words into safe working procedures and
practices, and they have difficulty applying the lessons learned from refinery
to refinery or even from within refineries,” said Mr. Michaels, the OSHA
administrator.
BP is contesting OSHA’s allegations, saying it has made substantial improvements
at both facilities.
Accidents have also continued to plague BP’s pipelines in Alaska. Most recently,
on May 25, a power failure led to a leak that overwhelmed a storage tank and
spilled about 200,000 gallons of oil — the third-largest spill on the
Trans-Alaska Pipeline System.
Mr. Dudley, the BP executive overseeing the gulf response, said it was unfair to
blame cultural failings at BP for the string of accidents.
“Everyone realized we had to operate safely and reliably, particularly in the
U.S., to restore a reputation that was damaged by the accident at Texas City,”
he said. “So I don’t accept, and have not witnessed, this cutting of corners and
the sacrifice of safety to drive results.”
Mr. Waxman, whose committee is investigating the Deepwater Horizon accident, has
a very different view. When Mr. Hayward testified a month ago, the
representative upbraided him: “There is a complete contradiction between BP’s
words and deeds. You were brought in to make safety the top priority of BP. But
under your leadership, BP has taken the most extreme risks.”
“BP cut corner after corner to save a million dollars here and a few hours
there,” Mr. Waxman said. “And now the whole Gulf Coast is paying the price.”
No industry
enjoys the array of tax breaks and subsidies that the oil and gas industry does.
No industry needs them less. For all the damage it has caused, the disastrous
oil spill in the Gulf of Mexico may provide the political momentum to end this
special treatment.
President Obama’s 2011 budget, proposed before the spill, would eliminate $4
billion in annual tax breaks for oil and gas companies. Bills in both houses
introduced after the spill would achieve many of the same results. Industry has
spent $340 million on lobbying over the last two years to block these sorts of
initiatives, and until recently Congress has been eager to do its bidding. This
year could be different.
The White House has proposed eliminating nine tax breaks. Some are modest, all
are complicated, but in toto they provide a range of cushy benefits — fast
write-offs for upfront drilling expenses, generous depletion allowances, and the
like — that are available at virtually every stage of the exploration and
production process.
The net result, as The Times reported recently, is an effective tax rate on
investment far lower than that paid by other industries. That, the Treasury
Department argues, has encouraged overinvestment in oil and gas drilling at the
expense of other parts of the economy.
Industry argues that these and other breaks are vital to robust domestic
production and that both investment and employment would fall if they were
eliminated. These arguments, which may have made sense years ago, are much less
compelling when oil prices are hovering near $80 a barrel and oil companies —
including BP — have been racking up huge profits.
Moreover, a Treasury Department analysis says that ending these breaks would
reduce domestic production by less than 1 percent. A separate study by
Congress’s Joint Economic Committee says that ending the biggest of the
deductions — 9 percent of qualified income from gas and oil produced in the
United States — would have zero effect on consumer prices.
Apart from these benefits, two other areas cry out for reform. One is the
royalty relief program, enacted by Congress in 1995 to encourage the kind of
deepwater drilling that has now landed the gulf, its wildlife and its
neighboring citizens in so much trouble. Royalty rates are currently 12.5
percent of the per-barrel price for onshore leases, and up to 18.75 percent
offshore.
The law suspended royalties as long as oil remained below a threshold price of
$28 a barrel. Prices have long since exceeded that threshold, even adjusted for
inflation; and because the law was not tightly written, companies have been able
to exploit its ambiguities to save themselves billions of dollars.
Sima Gandhi, a tax expert at the Center for American Progress, a liberal
advocacy group, estimates that the losses from lost royalties could eventually
exceed $80 billion unless Congress fixes the law. It is high time to review the
entire royalty relief program, which at current prices is surely outdated and
may be unnecessary.
The administration also needs to look carefully at the oil industry’s use of tax
havens abroad. The Senate Finance Committee has already announced that it will
examine whether Transocean, the operator of the Deepwater Horizon drilling rig,
exploited tax laws when it moved its headquarters first to the Cayman Islands,
then to Switzerland. Other oil companies also have foreign subsidiaries; the
question is whether and to what extent they use them to dodge taxes. The Times
article reported that Transocean alone had saved $1.8 billion in taxes since
moving overseas in 1999.
Instead of enriching the oil companies, Congress should end these unjustifiable
breaks and focus on encouraging alternative fuel sources that create cleaner
energy and new clean-energy jobs.
July 3,
2010
The New York Times
By DAVID KOCIENIEWSKI
When the
Deepwater Horizon drilling platform set off the worst oil spill at sea in
American history, it was flying the flag of the Marshall Islands. Registering
there allowed the rig’s owner to significantly reduce its American taxes.
The owner, Transocean, moved its corporate headquarters from Houston to the
Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also
helped it avoid taxes.
At the same time, BP was reaping sizable tax benefits from leasing the rig.
According to a letter sent in June to the Senate Finance Committee, the company
used a tax break for the oil industry to write off 70 percent of the rent for
Deepwater Horizon — a deduction of more than $225,000 a day since the lease
began.
With federal officials now considering a new tax on petroleum production to pay
for the cleanup, the industry is fighting the measure, warning that it will lead
to job losses and higher gasoline prices, as well as an increased dependence on
foreign oil.
But an examination of the American tax code indicates that oil production is
among the most heavily subsidized businesses, with tax breaks available at
virtually every stage of the exploration and extraction process.
According to the most recent study by the Congressional Budget Office, released
in 2005, capital investments like oil field leases and drilling equipment are
taxed at an effective rate of 9 percent, significantly lower than the overall
rate of 25 percent for businesses in general and lower than virtually any other
industry.
And for many small and midsize oil companies, the tax on capital investments is
so low that it is more than eliminated by var-ious credits. These companies’
returns on those investments are often higher after taxes than before.
“The flow of revenues to oil companies is like the gusher at the bottom of the
Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of
New Jersey, who has worked alongside the Obama administration on a bill that
would cut $20 billion in oil industry tax breaks over the next decade. “There is
no reason for these corporations to shortchange the American taxpayer.”
Oil industry officials say that the tax breaks, which average about $4 billion a
year according to various government reports, are a bargain for taxpayers. By
helping producers weather market fluctuations and invest in technology, tax
incentives are supporting an industry that the officials say provides 9.2
million jobs.
The American Petroleum Institute, an industry advocacy group, argues that even
with subsidies, oil producers paid or incurred $280 billion in American income
taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes
than most other American corporations.
As oil continues to spread across the Gulf of Mexico, however, the industry is
being forced to defend tax breaks that some say are being abused or are
outdated.
The Senate Finance Committee on Wednesday announced that it was investigating
whether Transocean had exploited tax laws by moving overseas to avoid paying
taxes in the United States. Efforts to curtail the tax breaks are likely to face
fierce opposition in Congress; the oil and natural gas industry has spent $340
million on lobbyists since 2008, according to the nonpartisan Center for
Responsive Politics, which monitors political spending.
Jack N. Gerard, president of the American Petroleum Institute, warns that any
cut in subsidies will cost jobs.
“These companies evaluate costs, risks and opportunities across the globe,” he
said. “So if the U.S. makes changes in the tax code that discourage drilling in
gulf waters, they will go elsewhere and take their jobs with them.”
But some government watchdog groups say that only the industry’s political
muscle is preserving the tax breaks. An economist for the Treasury Department
said in 2009 that a study had found that oil prices and potential profits were
so high that eliminating the subsidies would decrease American output by less
than half of one percent.
“We’re giving tax breaks to highly profitable companies to do what they would be
doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American
Progress, a liberal research organization. “That’s not an incentive; that’s a
giveaway.”
Some of the tax breaks date back nearly a century, when they were intended to
encourage exploration in an era of rudimentary technology, when costly
investments frequently produced only dry holes. Because of one lingering
provision from the Tariff Act of 1913, many small and midsize oil companies
based in the United States can claim deductions for the lost value of tapped oil
fields far beyond the amount the companies actually paid for the oil rights.
Other tax breaks were born of international politics. In an attempt to deter
Soviet influence in the Middle East in the 1950s, the State Department backed a
Saudi Arabian accounting maneuver that reclassified the royalties charged by
foreign governments to American oil drillers. Saudi Arabia and others began to
treat some of the royalties as taxes, which entitled the companies to subtract
those payments from their American tax bills. Despite repeated attempts to
forbid this accounting practice, companies continue to deduct the payments. The
Treasury Department estimates that it will cost $8.2 billion over the next
decade.
Over the last 10 years, oil companies have also been aggressive in using foreign
tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in
the Marshall Islands, where they are subject to lower taxes and less stringent
safety and staff regulations. American producers have also aggressively
exploited the tax code by opening small offices in low-tax countries. A recent
study by Martin A. Sullivan, an economist for the trade publication Tax
Analysts, found that the five oil drilling companies that had undergone these
“corporate inversions” had saved themselves a total of $4 billion in taxes since
1999.
Transocean — which has approximately 18,000 employees worldwide, including 1,300
in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in
taxes since moving overseas in 1999, the study found.
Transocean said it had paid more than $300 million in taxes so far for 2009, and
that its move reflected its global scope, with only 15 of its 139 rigs located
in the United States. “Transocean is truly a global company,” it said in a
statement.
Despite the public anger at the gulf spill, it is far from certain that Congress
will eliminate the tax breaks. As recently as 2005, when windfall profits for
energy companies prompted even President George W. Bush — a former Texas oilman
himself — to publicly call for an end to incentives, the energy bill he and
Congress enacted still included $2.6 billion in oil subsidies. In 2007, after
Democrats took control of Congress, a move to end the tax breaks failed.
Mr. Menendez said he believed the Gulf spill was devastating enough to spur
Congress into action. But one notable omission in his bill shows the vast
economic reach of the industry. While the legislation would cut many incentives
over the next decade, it would not touch the tax breaks for oil refineries, many
of which have operations and employees in his home state, New Jersey.
Mr. Menendez’s aides said the senator thought it was legitimate to allow
refineries to continue claiming a manufacturing tax credit that he wants to
eliminate for drillers because refining is a manufacturing business and because
refineries do not benefit from high oil prices. Mr. Menendez did not consult
with New Jersey refineries when writing the bill, his aides said.
As oil continued to pour into the Gulf of Mexico on a recent Saturday,
Jennifer Wilkerson spent three hours on the phone talking about life after
petroleum.
For Mrs. Wilkerson, 33, a moderate Democrat from Oakton, Va., who designs
computer interfaces, the spill reinforced what she had been obsessing over for
more than a year — that oil use was outstripping the world’s supply. She worried
about what would come after: maybe food shortages, a collapse of the economy, a
breakdown of civil order. Her call was part of a telephone course about how to
live through it all.
In bleak times, there is a boom in doom.
Americans have long been fascinated by disaster scenarios, from the population
explosion to the cold war to global warming. These days the doomers, as Mrs.
Wilkerson jokingly calls herself and likeminded others, have a new focus: peak
oil. They argue that oil supplies peaked as early as 2008 and will decline
rapidly, taking the economy with them.
Located somewhere between the environmental movement and the bunkered
survivalists, the peak oil crowd is small but growing, reaching from health food
stores to Congress, where a Democrat and a Republican formed a Congressional
Peak Oil Caucus.
And they have been resourceful, sharing the concerns of other “collapsitarians,”
including global debt and climate change — both caused by overuse of diminishing
oil supplies, they maintain.
Many people dispute the peak oil hypothesis, including Daniel Yergin, the
Pulitzer Prize-winning author of “The Prize: The Epic Quest for Oil, Money and
Power” and chairman of IHS Cambridge Energy Research Associates, a company that
advises governments and industry. Mr. Yergin has argued that new technology
continues to bring more oil.
Andre Angelantoni is not taking that chance. In his home in San Rafael, Calif.,
he has stocked food reserves in case an oil squeeze prevents food from reaching
market and has converted his investments into gold and silver.
The effects of peak oil, including high energy prices, will not be gentle, said
Mr. Angelantoni, a Web designer whose company, Post Peak Living, offers the
telephone class and a handful of online courses for life after a collapse.
“Our whole economy depends on greater and greater energy supplies, and that just
isn’t possible,” he said. “I wish I could say we’ll quietly accept having many
millions of people unemployed, their homes foreclosed. But it’s hard to see the
whole country transitioning to a low-energy future without people becoming
angry. There’s going to be quite a bit of social turmoil on the way down.”
Transition US, a British transplant that seeks to help towns brace for life
after oil, including a “population die-off” from shortages of oil, food and
medicine, now has 68 official chapters around the country, since starting with
just two in 2008. Group projects range from community vegetable gardens to
creating local currency in case the national one crashes.
Bleak books like James Howard Kunstler’s “The Long Emergency: Surviving the End
of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First
Century” and Richard Heinberg’s “The Party’s Over: Oil, War and the Fate of
Industrial Societies” have sold 100,000 and 50,000 copies, respectively,
according to their publishers.
In Congress in 2005, Representative Roscoe G. Bartlett, Republican of Maryland,
and Senator Tom Udall, a New Mexico Democrat who was a representative at the
time, created the Congressional Peak Oil Caucus. Web sites, online videos and
numerous social networks connect adherents in ways that would once have been
impossible.
Mr. Angelantoni, 40, came to his concern about peak oil from an interest in
climate change, because he felt its impact would be more precipitous. “The peak
oil conversation is where the climate change conversation was 20 years ago,” he
said. He distinguished the peak oil crowd from the environmental movement. “The
Sierra Club tells people that if we use less energy, the underlying model is
sound,” he said. “I don’t think that’s the case.”
Like several people in the telephone class, he said his concern with peak oil
had strained his relationship with his spouse, creating an “unbridgeable”
distance between them.
“It’s very difficult for people to hear that this form of the economy is
breaking down,” he said. “They think that because it hasn’t happened yet that it
won’t ever happen.”
Mrs. Wilkerson has now read two dozen books about peak oil and related topics.
For a while, she became depressed at work and had trouble discussing her
feelings with her husband because the conversations were so dire, she said. At
work, her colleagues told her directly “that they were tired of hearing about
it,” she said. “They felt I was going to an extreme, thinking collapse was going
to happen.”
She added, “I was ready to move out to the country and be an organic farmer, but
I learned that’s not the way to do it. You need a community.”
Despite the rapid growth of Transition US, the movement was much easier to sell
in England, said Raven Gray, who came to this country to found a branch here.
While Americans embrace doomsday scenarios, they are less likely to work
together on how to live afterward, she said.
“There’s lot of apocalyptic people in environmental circles,” she said. “A lot
of those people were outraged that we presented an optimistic view of the
future. There’s a dark vision driving us, but we’re about moving toward a
positive picture of what can be done.”
For Mrs. Wilkerson, who is now growing vegetables in her kitchen, the course,
which cost $175, gave her encouragement to move in that direction.
“Whether or not collapse happens, being able to teach other people to grow food
so they can weather any adversity is a good investment of my time,” she said.
September 24, 2009
The New York Times
By JAD MOUAWAD
The oil industry has been on a hot streak this year, thanks to a series of
major discoveries that have rekindled a sense of excitement across the petroleum
sector, despite falling prices and a tough economy.
These discoveries, spanning five continents, are the result of hefty investments
that began earlier in the decade when oil prices rose, and of new technologies
that allow explorers to drill at greater depths and break tougher rocks.
“That’s the wonderful thing about price signals in a free market — it puts
people in a better position to take more exploration risk,” said James T.
Hackett, chairman and chief executive of Anadarko Petroleum.
More than 200 discoveries have been reported so far this year in dozens of
countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran,
Brazil, Norway, Ghana and Russia. They have been made by international giants,
like Exxon Mobil, but also by industry minnows, like Tullow Oil.
Just this month, BP said that it found a giant deepwater field that might turn
out to be the biggest oil discovery ever in the Gulf of Mexico, while Anadarko
announced a large find in an “exciting and highly prospective” region off Sierra
Leone.
It is normal for companies to discover billions of barrels of new oil every
year, but this year’s pace is unusually brisk. New oil discoveries have totaled
about 10 billion barrels in the first half of the year, according to IHS
Cambridge Energy Research Associates. If discoveries continue at that pace
through year-end, they are likely to reach the highest level since 2000.
While recent years have featured speculation about a coming peak and subsequent
decline in oil production, people in the industry say there is still plenty of
oil in the ground, especially beneath the ocean floor, even if finding and
extracting it is becoming harder. They say that prices and the pace of
technological improvement remain the principal factors governing oil production
capacity.
While the industry is celebrating the recent discoveries, many executives are
anxious about the immediate future, fearing that lower prices might jeopardize
their exploration drive. The world economy is weak, oil prices have tumbled from
last year’s records, corporate profits have shrunk, and global demand for oil
remains low. After falling to $34 in December, oil prices have doubled,
stabilizing near $70 a barrel. But if the world economy does not pick up, some
analysts believe the price could fall again.
Oil companies contend that is not a prospect they can afford. Despite reaping
record profits in recent years, many executives have warned that they need
prices above $60 a barrel to develop the world’s more challenging reserves. In
fact, some exploration activity has already slowed this year, as producers seek
better terms from service companies and contractors.
It is not just oil that is benefiting from the exploration boom. Repsol, Spain’s
biggest oil company, said this month that it had discovered what could turn out
to be Venezuela’s biggest natural gas field. In recent years, companies have
found substantial natural gas reserves in the United States, from shale rocks
once believed to be impossible to drill.
“The No. 1 question that exploration teams have right now is, Where do we go
next?” said Robert Fryklund, who ran the operations of ConocoPhillips in Libya
and Brazil, and is a vice president in Houston at Cambridge Energy Research
Associates.
Exploration spending swelled in recent years, partly to offset a doubling of
costs throughout the industry — from steel prices to the cost of renting
deepwater drilling rigs. A big issue confronting the industry now is how to
drive down costs while maintaining a high level of exploration. On average,
costs have fallen by 15 to 20 percent from their peak, according to petroleum
executives.
Exploration remains a risky, and costly, business, where some deepwater wells
can cost up to $100 million. From 30 to 50 percent of exploration wells find
oil.
Some executives are also worried the world might face a shortfall in supplies in
coming years if another decline in oil prices causes exploration to falter.
The chief executive of the French oil giant Total, Christophe de Margerie, has
warned that such a supply crunch is possible by the middle of the next decade.
“There could be a shortage of capacity,” he said.
His concerns echoed those of Abdullah al-Badri, the secretary general of the
Organization of the Petroleum Exporting Countries, who said that lower oil
prices also threatened investments by OPEC nations.
Saudi Arabia is also unlikely to expand its production in coming years because
of the uncertainty clouding future oil demand, Ali al-Naimi, the kingdom’s oil
minister, signaled earlier this month. Saudi Arabia is just completing a $100
billion program to increase its capacity to 12.5 million barrels a day, from
around 9 million barrels a day just a few years ago.
Although they are substantial, the new finds do not match the giant fields
discovered in the 1970s, like Alaska’s Prudhoe Bay, Ekofisk in the North Sea, or
Cantarell in Mexico. They are also dwarfed by the last enormous discovery, the
Kashagan field in the Caspian Sea, discovered in 2000 and estimated to hold over
20 billion barrels of oil.
“We have not seen another Kashagan, but still these finds are very material,”
said Alan Murray, the exploration service manager at Wood Mackenzie, a
consulting firm in Edinburgh.
Since the early 1980s, discoveries have failed to keep up with the global rate
of oil consumption, which last year reached 31 billion barrels of oil. Instead,
companies have managed to expand production by finding new ways of getting more
oil out of existing fields, or producing oil through unconventional sources,
like Canada’s tar sands or heavy oil in Venezuela.
Reserve estimates typically rise over the life of a field, which can often be
productive for decades, as companies find new ways of getting more oil out of
the ground.
The industry’s record has improved in recent years, thanks to high prices.
According to Cambridge Energy Research Associates, oil companies have found more
oil than they produced for the last two years through a combination of
exploration and field expansions.
“The appetite for opening new frontiers when prices were low in the 1990s was
very small,” said Paolo Scaroni, the chief executive of Italy’s oil giant Eni.
“Today, the biggest discovery of all is technology.”
One of the largest finds this year was made by a small producer, Heritage Oil,
at the Miran West One field in the Kurdistan region of northern Iraq. It found
nearly two billion barrels of oil and plans to drill a second well before the
end of the year. While the central government of Iraq has had a hard time
attracting investors to develop its huge fields, local authorities in Kurdistan
have been successfully wooing foreign producers.
Meanwhile, in the Gulf of Mexico, BP’s discovery proves that the area remains
one of the most promising oil regions in the United States. BP has estimated
that the Tiber field holds four billion to six billion barrels of oil and gas,
which would be enough, in theory, to meet domestic consumption for more than a
year.
“In 30 years I’ve been in the business, the Gulf of Mexico has been called the
Dead Sea countless times,” said Bobby Ryan, the vice president of global
exploration at Chevron. “And yet it continues to revitalize itself.”
Exxon Mobil, the world’s biggest publicly traded oil company,
said Thursday that its profit dropped 66 percent in a second quarter after a
sharp fall in oil prices in the last year.
The oil giant reported that its net income fell to $3.95 billion, or 81 cents a
share, from $11.68 billion, or $2.22 a share, in the period a year ago.
Capital spending fell 6 percent to $6.56 billion in the quarter.
“Global economic conditions continue to impact the energy industry both in the
volatility of commodity prices and reduced demand for products,” the company’s
chairman and chief executive, Rex W. Tillerson, said in a statement.
The company’s combined oil and gas production fell 3 percent in the quarter,
because of restrictions imposed by OPEC producers and lower output from mature
fields. Exxon’s oil production in the quarter averaged 2.35 million barrels a
day and gas production was about 8.01 billion cubic feet a day. The company said
it increased its output from new projects in Qatar and in the United States.
Profit at the company’s production and exploration unit fell to $3.81 billion in
the second quarter, down $6.2 billion compared with a year earlier. In its
refining business, Exxon saw its profit drop to $512 million, down $1.05 billion
from a year ago. That included a loss of $15 million at Exxon’s domestic
refining business.
Despite the lower profit, Exxon continued its program to reward shareholders by
buying back shares and paying dividends. The company spent $5.2 billion in the
second quarter to buy back 75 million shares.
Exxon’s report caps a week of lower earnings across the energy industry after
oil prices tumbled from last year’s record levels and the global economy slowed
down. Oil prices, which had reached a record closing price of $145.29 a barrel
last July, recently traded around $63 a barrel.
The global recession is expected to reduce oil consumption around the world for
a second consecutive year, the first time that’s happened since the early 1980s.
Oil companies, which are struggling to adapt to a new environment of lower
prices and slower demand, have responded by slashing costs, paring down drilling
activities and shutting some operations.
Earlier on Thursday, Royal Dutch Shell reported that its net profit fell 67
percent in the second quarter, to $3.82 billion, from $11.6 billion in the
period a year ago. Sales were $63.9 billion, down from $131.4 billion in the
quarter a year ago. The company said that it planned to reduce capital spending
by more than 10 percent next year to about $28 billion and that it would cut
jobs.
Earnings at Shell’s exploration and production unit dropped 77 percent, to $1.33
billion, from $5,9 billion a year ago, mostly on lower oil prices. Production
declined 6 percent, to 2.9 million barrels of oil and equivalents a day, while
prices were $52.62 a barrel, down from $111.92 in the period a year ago.
“Our second quarter results were affected by the weak global economy. Shell’s
chief executive, Peter R. Voser, said. “This weakness is creating a difficult
environment both in upstream and downstream.”
On Wednesday, ConocoPhillips, the third-largest American oil company after Exxon
and Chevron, said that its quarterly profits tumbled 76 percent, to $1.3
billion, after a loss in its refining business. Chevron reports its earnings on
Friday.
The British oil giant BP said earlier this week that its profit declined 53
percent, to $4.39 billion. The company said it would reduce its costs by $3
billion this year, $1 billion more than it had initially planned. The company’s
chief executive, Tony Hayward, also signaled that he expected oil prices hover
in a range of $60 to $90 a barrel.
April 24, 2009
Filed at 5:34 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
SINGAPORE (AP) -- Oil prices hovered below $50 a barrel Friday in
Asia as investors pondered whether a possible second half recovery will help
boost U.S. crude demand, in the doldrums amid rising unemployment and a severe
recession.
Benchmark crude for June delivery rose 31 cents to $49.93 a barrel by late
afternoon in Singapore in electronic trading on the New York Mercantile
Exchange. The contract rose Thursday 77 cents to settle at $49.62.
Oil prices have traded near $50 a barrel for most of this month as investors
ponder whether massive government stimulus packages around the world will be
able to spark a rebound from the global recession.
''The price has been fairly resilient at the $50 level given the oil market
fundamentals in the near term are very negative,'' said Victor Shum, energy
analyst with consultancy Purvin & Gertz in Singapore. ''Some investors are
looking ahead, believing in the eventual revival in global economy.''
A spike in joblessness and waning consumer spending during the last six months
has helped keep prices from rising further. The Labor Department said Thursday
that initial claims for unemployment compensation rose to a seasonally adjusted
640,000, up from a revised 613,000 the previous week. That was slightly above
analysts' expectations.
The number of workers continuing to file claims for unemployment benefits topped
6.1 million.
General Motors Corp. said Thursday it will temporarily close 13 assembly plants
in the U.S. and Mexico between 3 weeks and 11 weeks, laying off nearly 24,000
workers to pare back a bloated inventory.
The Organization of Petroleum Exporting Countries, which produces about 40
percent of global supply, is next meeting on May 28 and may announced another
output cut on top of the 4.2 million a day of quotas reductions the cartel has
pledged since September.
''More bad macroeconomic or company news could pull down oil,'' Shum said. ''If
it goes down toward $40, it would put pressure on OPEC to cut.''
One sign of the speed of the economic downturn is natural gas in storage is now
36 percent greater than it was at this time last year. The Energy Department's
Energy Information Administration said Thursday in its weekly report that
natural gas inventories held in underground storage in the lower 48 states are
23 percent above the five-year average.
''Investors can only hold up the price without fundamentals for so long,'' Shum
said.
In other Nymex trading, gasoline for May delivery fell 0.29 cent to $1.39 a
gallon and heating oil was steady at $1.32 a gallon. Natural gas for May
delivery dropped 1.5 cents to $3.39 per 1,000 cubic feet.
In London, Brent prices rose 20 cents to $50.31 a barrel on the ICE Futures
exchange.
February 20, 2009
Filed at 4:03 a.m. ET
The New York Times
By REUTERS
LONDON (Reuters) - Oil fell below $39 a barrel on Friday, retreating as the
global economic outlook deteriorated, dragging stock markets down across the
world.
Oil prices rallied strongly on Thursday, jumping 14 percent after data showing
an unexpected draw in U.S. crude stocks. But worries over the health of oil
demand have resurfaced, with sentiment dented by sharp falls in equity markets.
European shares fell in early trade on Friday with the FTSEurofirst 300 down 2.2
percent, after falls in New York and Asia. The broad Topix index of Japanese
shares closed at its lowest level in about 25 years.
U.S. crude futures for March delivery, which expire on Friday, were down 89
cents at $38.59 a barrel by 3:50 a.m. EST, after posting the biggest settlement
gain since December 31 in the previous session.
April delivery contracts fell 69 cents to $39.49, while London Brent for April
delivery dropped 40 cents to $41.59 a barrel.
Most pressure appeared to be on the expiring March U.S. crude contract, which
has been weighed down by unusually high levels of crude inventories at Cushing,
Oklahoma, the delivery point for the NYMEX futures contract.
Brent and later U.S. crude futures months were more stable.
BLEAKEST DIAGNOSIS EVER
"Brent bounced back above $40 yesterday," Christopher Bellew, broker at Bache
Commodities in London, said. "In spite of economic gloom and bearish data, Brent
is holding its sideways range."
In its monthly report on Friday, the Bank of Japan reiterated that economic
conditions were deteriorating rapidly -- its bleakest diagnosis ever -- and
would likely continue to worsen for the time being.
Japan has been hit particularly hard by the global slump, triggered by the U.S.
housing market meltdown, due to its heavy dependence on exports and chronically
weak domestic consumption.
Crude inventories in the United States, the world's top consumer, fell slightly
last week on lower imports and higher demand, the U.S. Energy Information
Administration said, snapping seven straight weeks of builds against market
expectations.
The bullish oil data countered pessimism in the U.S. stock market, where the Dow
industrials index closed at its lowest in more than six years on a gloomy jobs
report and fears that banks could be nationalized.
Crude prices have fallen more than $100 a barrel from the peaks hit last July as
the worsening economic crisis has bitten into oil demand, prompting the
Organization of the Petroleum Exporting Countries (OPEC) to agree to deep output
cuts.
In the latest indication that OPEC members are complying with the agreed cuts,
Kuwait notified at least two buyers in Asia that it will keep curbs of 5 percent
below contracted volumes for April-June term crude oil supplies, steady from
March, trade sources said.
U.S. economic reports due out later in the day include the consumer price index
and real earnings for January, as well as the Economic Cycle Research
Institute's (ECRI) weekly index of economic activity.
(Reporting by Christopher Johnson in London
and Chua Baizhen in Singapore;
Editing by Sue Thomas)
December 4, 2008
Filed at 2:41 a.m. ET
The New York Times
By REUTERS
SINGAPORE (Reuters) - Oil fell below $46 a barrel to its lowest in nearly
four years on Thursday, extending four consecutive days of falls as continued
demand worries minimized bullish draws in U.S. oil stocks.
Oil prices have lost more than $100 a barrel since an all-time high of $147.27
hit in July, and some 16 percent from last week, as demand is seen weakening
worldwide and analysts expect it to contract this year and next.
U.S. light crude for January delivery fell $1.16 to $45.63 a barrel by 0655 GMT
(2:55 a.m. EST), off an earlier low of $45.30, the lowest since a $44.60 low hit
on February 9, 2005.
Oil settled down 17 cents at $46.79 on Wednesday.
London Brent crude slid $1.34 to $44.10, up from an earlier $43.80 low.
"Stabilization in macroeconomic expectations is likely to precede any switch in
oil market sentiment away from a mainly demand-side focus," Barclays Capital
said in its weekly oil data review.
Bullish oil data on Wednesday pushed prices higher during the session, when the
U.S. Energy Information Administration said crude stocks fell 400,000 barrels in
the week to November 28, against an expected 1.7 million barrels build.
Distillate stocks, which include heating oil, fell 1.7 million barrels to 125
million, against a forecast for a 300,000-barrel increase, while gasoline
supplies dropped 1.6 million barrels, having been expected to rise by 900,000
barrels.
But the product inventory falls came amid lower refinery utilization, which fell
1.9 percentage points to 84.3 percent of capacity last week against a predicted
rise of 0.2 percentage point, showing weakening demand.
"Refiners began to cut processing rates significantly," said Jan Stuart,
economist in New York for UBS, in a report.
Worries about a deepening economic downturn resurfaced as a measure of the U.S.
service sector, which represents about 80 percent of U.S. economic activity,
slumped further than expected to a record low in November, according to the
Institute of Supply Management.
The Institute said its non-manufacturing index came in at 37.3 versus 44.4 in
October, and against expectations for a reading of 42.0.
Adding to the gloom, U.S. private employers cut 250,000 jobs in November, a
7-year high, and U.S. third-quarter labor costs were revised lower as the
recession hit jobs.
Growing economic woes and falling prices have prompted oil producer group OPEC
to consider another round of cuts to oil output when it next meets December 17
in Algeria.
November
16, 2008
The New York Times
By JAD MOUAWAD
SIX years
of relentlessly rising prices have showered the oil industry with record profits
even as whipsawing energy costs have left many Americans alternately furious and
baffled.
Now that the roller coaster ride appears to be screeching to a halt, one
corporate giant remains confident it can weather the slowdown and uncertainty
better than its rivals.
“It’s not that we like lower prices, but our competitive advantage is more
obvious to people in a low-price environment,” says Rex W. Tillerson, the
chairman and chief executive of Exxon Mobil, the world’s largest, mightiest oil
company. “But in a high-price environment, our competitive advantage has been
quite evident as well.”
However undaunted Exxon feels, it’s still facing more complicated scenarios than
mere price shifts. It’s straining to adjust to a host of potentially seismic
issues that raise pointed questions about its long-term strategy. Oil reserves
are harder to find, resource-rich governments have become more assertive, and
global warming concerns have spurred forceful calls to action on environmental
matters.
Moreover, with the election of Barack Obama, a new chapter is about to open for
the nation’s energy policy. Mr. Obama says he wants to move away from oil
dependence, and his policies are likely to emphasize conservation, alternative
energy sources and new limits on the emissions of greenhouse gases responsible
for climate change.
The question for Exxon, which Mr. Obama repeatedly singled out as an exemplar of
corporate greed during the presidential campaign, is whether the model that has
served the company so well for so long will keep it competitive — or whether it
will still be producing hydrocarbons long after the world has moved away from
dirty fuels.
Last year, Exxon, which is based in Irving, Tex., celebrated its 125th
anniversary, marking a straight line that connects it to John D. Rockefeller’s
original Standard Oil Trust before the government broke up the enterprise. While
other oil companies try to paint themselves greener, Exxon’s executives believe
their venerable model has been battle-tested. The company’s mantra is
unwavering: brutal honesty about the need for oil and gas to power economies for
decades to come.
“Over the years, there have been many predictions that our industry was in its
twilight years, only to be proven wrong,” says Mr. Tillerson. “As Mark Twain
said, the news of our demise has been greatly exaggerated.”
FROM a purely financial standpoint, there’s no doubt that Exxon’s business
strategy has paid off. Despite the broader economic turmoil, Exxon is worth
around $375 billion — more than General Electric, Bank of America and Google
combined — making it the world’s largest corporation.
Its balance sheet is pristine and its credit rating is better than that of most
governments. If Exxon’s revenue were stacked against the world’s G.D.P.’s, it
would rank between Austria and Greece as the 26th-largest economy. As oil prices
peaked this summer, the company once again set a record as the most profitable
American corporation, earning $14.8 billion in the third quarter. Since 2004
alone, the company has rung up profits of about $180 billion.
Throughout its various incarnations — the Standard Oil Trust, Standard Oil of
New Jersey, the Exxon Corporation, and now Exxon Mobil — the company has been an
ambiguous fascination for many Americans. It is an enduring icon, as lasting as
Coca-Cola or General Electric, but also a perennial corporate villain, one that
reminds the nation of its dependence on hydrocarbons.
For some, the environmental impact of that earnings gusher outweighs the
financial gains.
“Being Exxon is never having to say you’re sorry,” says Kert Davies, the
research director at Greenpeace, the environmental advocacy group that has
battled with Exxon for years.
On the financial front, however, Exxon’s jaw-dropping results have continued to
leave many analysts beaming.
“It’s the world’s greatest company, period,” says Arjun N. Murti, a Goldman
Sachs oil analyst. “I would put Exxon up against any other company at any other
period of time.”
“It is also the most misunderstood company in the world,” he adds. “For many
people, the image of Exxon is the Exxon Valdez. But there is much more to Exxon
than that. Somehow, Exxon has persevered over the past 100 years with the best
culture and management team any company could have.”
What might be called the Exxon Way can be summed up in three ideals: discipline,
patience and long-term vision. It is a formula the company drills into its
managers from the moment they join Exxon, and which it keeps repeating through
their careers. It explains the company’s resilience and its view that it has
survived, and thrived, through countless commodity cycles.
“We are all homegrown,” Mr. Tillerson says. “That happens through a very
deliberate and very closely managed process, and it starts the day the person
walks through the door with us. And we are the product of that system. If there
is a DNA it is something you grow into after many years of working with your
colleagues. It is clearly the defining strength of the company.”
TAKE a room full of oil managers, and the Exxon people usually stand out, even
as they try not to draw much attention to themselves. They typically band
together, and often cultivate an aura of secrecy — and sometimes superiority —
toward the outside world.
At Exxon, the engineers rule. From its very early days, the company has focused
relentlessly on one thing: finding more ways to squeeze every penny out of each
barrel of oil.
Mr. Rockefeller was an accountant who was obsessed with efficiency, and his
fixations still run through the company’s veins, says Joseph Allen Pratt, a
historian and management professor at the University of Houston. Mr. Pratt is
writing the fifth volume of Exxon’s official corporate history, which the
company is partly financing.
“There definitely is an Exxon way,” Mr. Pratt says. “This is John D.
Rockefeller’s company, this is Standard Oil of New Jersey, this is the one that
is most closely shaped by Rockefeller’s traditions. Their values are very clear.
They are deeply embedded. They have roots in 100 years of corporate history.”
But the company’s DNA goes well beyond the surface. Rivals acknowledge its
expertise around an oil field, even as they bristle at what they call arrogance.
Exxon’s own executives brag that their company outperforms its peers by sticking
to their playbook.
“Exxon is a very professional company,” says Jeroen van der Veer, the chief
executive of a leading competitor, Royal Dutch Shell.
Others say they respect the company’s clarity of vision. “People know the rules
when they work with Exxon,” said a top oil executive who asked not to be
identified in order not to jeopardize his company’s relationship with Exxon.
“Exxon can pick its battles. It’s a pretty good strategy to have if people know
that you will fight to the bitter end.”
Examples of such grit abound. After a dispute with the Venezuelan government,
during which Exxon persuaded a British court to briefly freeze $12 billion in
government assets to fight what it considered an expropriation, the country’s
oil minister accused the company of “legal terrorism.”
Whatever its critics might say about the company’s hard-headedness, it has paid
off in Exxon’s bottom line. Last year, Exxon’s profit per barrel was $17,
exceeding BP’s $12 a barrel, Shell’s $14 and Chevron’s $16, according to Neil
McMahon, a Bernstein Research analyst.
No one is apologetic at Exxon about what it takes to get those results,
especially Mr. Tillerson.
“The business model is based on a disciplined and rigorous approach to dealing
with scientific data and facts,” he says. “What we do is largely invisible to
the public. They see the nozzle at the pump, and that’s about it. They don’t see
the enormous level of risk that is managed very well to get that gallon of gas.”
Exxon has battled powerful forces in recent years, locking horns with
governments and multinational rivals from Africa to Central Asia, from Eastern
Europe to South America. But last spring, the challenge struck closer to home —
at the company’s annual shareholder meeting in Dallas.
As oil prices zoomed above $100 a barrel, a group of investors tried to force
Exxon to lay out a new strategy for developing alternative fuels and addressing
global warming. While the challenge was not unprecedented — raucous shareholder
meetings have been a staple for years — the dissent was led by a symbolic, if
slightly quixotic, constituency: descendants of Mr. Rockefeller, who founded
Standard Oil in 1882.
“Exxon Mobil needs to reconnect with the forward-looking and entrepreneurial
vision of my great-grandfather,” said Neva Rockefeller Goodwin, a Tufts
University economist, speaking for the family. The company, she added at the
time, was focused “on a narrow path that ignores the rapidly shifting energy
landscape around the world.”
Exxon’s top managers easily brushed off the Rockefeller revolt, as they have so
many obstacles over the years. Even so, Exxon and the other oil giants are
facing a stark new landscape.
High prices have meant stratospheric profits, of course, but they have also led
to more restrictions on access to oil fields around the world, making it harder
for companies to increase their production and replace reserves.
“The largest oil companies are under tremendous pressure,” said Fadel Gheit, a
veteran oil analyst at Oppenheimer & Company, who worked for the Mobil
Corporation before moving to Wall Street.
In the 1960s, the so-called Seven Sisters oil companies, including Exxon and
Mobil, controlled most of the world’s oil reserves. Today, state-owned
companies, like Saudi Aramco, hold the vast majority of these reserves, while
other resource holders like Russia and Venezuela have become increasingly
assertive about limiting access to their reserves.
“The problem is very real,” said Henry Lee, a lecturer in energy policy at
Harvard University. “The oil majors are looking at a very different world than
20 years ago. That has big implications for the future of these companies. They
all know it and they are all trying to figure out where they are going to be in
10 and 20 years.”
The threat from state-controlled energy companies — and the larger question of
tapping reserves — led to the big wave of industry mergers in the late 1990s,
including Exxon’s $81 billion purchase of Mobil in 1999.
“We were worried,” says Lou Noto, the former chairman of Mobil. “We expected the
environment to become more volatile, and more competitive, and more difficult
geographically and geologically. The easy stuff had been found and we were
getting into very esoteric stuff.”
While the combination of Exxon and Mobil created the world’s most valuable oil
company, the joint entity has struggled to expand production. Exxon derives its
strength from its size. But its problems are also a function of size: the
company has become so large that to grow it must find increasingly big projects.
At an analyst meeting on Wall Street in March, Mr. Tillerson acknowledged the
difficulty he faces: “The challenge we have today is continuing to have access
to resources.”
Since 1999, Exxon has spent about $125 billion foraging for new energy supplies
around the globe. It expects to spend $25 billion to $30 billion each year
through 2012 to seek and develop hydrocarbons. Yet the company is pumping about
as much oil and gas today as Exxon and Mobil once did separately. In fact,
Exxon’s hydrocarbon production has been falling recently, dropping 8 percent, to
3.6 million barrels a day in the third quarter, compared with 3.9 million
barrels a day in the period last year.
With about $37 billion in cash and a clean balance sheet, Exxon can afford to be
picky about what prospects to explore. It has about 120 projects on its books,
either in operation or in the planning stages, and it sits on up to 72 billion
barrels of oil and gas reserves around the world, the most of any nonstate oil
company.
To keep up momentum, Exxon plans to start up more than 60 fields or major
projects by 2011, including dozens of offshore fields in West Africa, export
terminals for liquefied natural gas in the Middle East, and scores of gas and
oil developments in Australia, Indonesia, the United States and the Caspian Sea.
Still, despite its ability to stride the energy world like a colossus, Exxon
remains more cautious than its rivals. Rather than overspend, it sows its huge
returns in-house through share buybacks and large dividend payments to
shareholders.
From 2003 to the third quarter of 2008, the company has paid out nearly $150
billion to shareholders — spending over $40 billion in dividends and buying back
about $110 billion worth of shares.
Yet Exxon’s shares are on track for their worst performance since the early
1980s, a result of the market sell-off and the drop in oil prices recently. Some
analysts also said it reflected the questions hanging over the company’s
long-term strategy. “Exxon is a cash machine, and they could be using that cash
to invest in clean technologies that would expand their base,” said Andy
Stevenson, an energy analyst at the Natural Resources Defense Council. “Right
now, they have no growth story. They are trapped in oil and gas.”
IF Exxon maintained its current buyback rate of $8 billion each quarter, it
would become a private corporation between 2020 and 2030, according to a report
by Bernstein Research. While that’s unlikely, these payouts — $30 billion so far
this year — have been criticized by some experts, who would like to see the
company invest more to increase its production or expand its reserves.
“If a company is not replacing reserves, and they are spending their cash to buy
back their shares, and they are not growing their production, that is called
liquidating the company,” says Amy Myers Jaffe, the associate director of Rice
University’s energy program in Houston.
Ultimately, the biggest test for Exxon’s long-term business model is the fact
that rising energy use — whether in the United States or in China — will
eventually have to be reconciled with reducing carbon emissions and finding
low-carbon energy sources. But as its contentious shareholder meeting with the
Rockefeller heirs demonstrated, few topics are as touchy as Exxon’s stance on
climate change.
During the tenure of Lee R. Raymond, who ran the company from 1993 to 2005,
Exxon became the lightning rod in the debate about climate change. Throughout
the 1990s, the company was vilified by environmental groups and scientists for
questioning the impact of human activities — especially the use of fossil fuels
— on global warming.
Gingerly, over the last three years, Exxon has moved away from its extreme
position. It stopped financing climate skeptics this year, and has sought to
soften its image with a $100 million advertising campaign featuring real company
executives, scientists and managers. One of the ads said the company aimed to
provide energy “with dramatically lower CO2 emissions.”
The company has acknowledged that climate change is a risk to the world. In a
speech given before the Royal Institute of International Affairs in London last
year, Mr. Tillerson said policy makers should consider setting a carbon tax or a
plan that limits carbon emissions through a cap-and-trade system.
But while Exxon is slowly unshackling itself from Mr. Raymond’s stance on global
warming, it remains faithful to his legacy by dismissing most green alternatives
and sticking with hydrocarbons. Although the company’s tone has changed, its
strategy has not. Despite growing pressures on oil companies to invest in
alternative energy, Exxon’s long-term view remains unapologetically tied to
fossil fuels.
“Rex looks more approachable than his predecessor,” says a rival executive who
requested anonymity because he did not want to jeopardize his relationship with
Mr. Tillerson, “but he is more inflexible.”
Exxon’s belief is that as populations expand and economies grow in developing
countries, they will aspire to the comforts and amenities taken for granted in
industrialized nations, and this will mean more cars on the roads — and more oil
to power them.
According to Exxon’s own outlook, global oil demand is set to reach 116 million
barrels a day by 2030, up sharply from 86 million barrels a day today.
Meanwhile, renewable fuels, like solar, wind and biofuels, will grow at a brisk
pace but they will account for just 2 percent of the world’s energy supplies by
then, according to Exxon, while oil, gas and coal will represent 80 percent of
global energy needs by 2030.
“For the foreseeable future — and in my horizon that is to the middle of the
century — the world will continue to rely dominantly on hydrocarbons to fuel its
economy,” Mr. Tillerson says.
For the moment, Exxon does not see much business sense in investing in solar, as
BP has, or wind, like Shell, or geothermal, like Chevron. Like many oil
executives, Mr. Tillerson also has little sympathy for corn-based ethanol, which
he once derisively referred to as “moonshine.”
Exxon does not entirely close the door to alternative investments someday. But
its previous forays into renewable fuels — it was a big investor in nuclear
power, synthetic fuels and solar energy in the 1970s — are seen as a costly
lesson.
“Being first in something is not necessarily the best position to be in,” Mr.
Tillerson says. “You can be more profitable for your shareholders by coming at a
later stage.”
Still, Exxon sees itself as a technology-based company. Its labs are developing
a thin-film battery separator and an onboard hydrogen system that could increase
the range of electric cars or make the current internal combustion engines much
more efficient.
The company points out that it has invested more than $1.5 billion to improve
its own energy use and cut carbon emissions since 2004. And it boasts that it is
spending $100 million to finance a long-term research program at Stanford
University, along with General Electric, Toyota and the oilfield-services
company Schlumberger, to find ways to increase energy supplies while reducing
the emissions of greenhouse gases.
But to many of the company’s critics, these measures look like a convenient
smoke screens.
“That’s kind of laughable,” says Mr. Davies of Greenpeace. “What Exxon is
clearly saying is that we are addicted to oil.”
THE biggest area where Exxon may have an impact in tackling climate change is in
what the industry calls carbon capture and sequestration. Most climate experts
say that combating global warming will involve preventing heat-trapping gases
like carbon dioxide from being spewed into the atmosphere by capturing them and
pumping them underground.
In May, Exxon said it would invest $100 million in a demonstration plant in
Wyoming to test a new cryogenic technology to capture carbon dioxide by freezing
it. Managing these flows, and reducing the costs of this prohibitively expensive
technology, may ultimately create a new business for Exxon if it can apply it to
large emission sources, like coal-fired power plants.
But for the company to see this as a large-scale opportunity would require a
“cultural leap,” Ms. Jaffe says.
“Exxon may wind up being the carbon sequestration king, by accident,” she says.
Whatever shape Exxon’s business model takes, analysts say it is unlikely that
the company will get there quietly.
“They are tough, and they have the reputation of being an unyielding company,”
says Michelle Michot Foss, who heads the Center for Energy Economics at the
University of Texas at Austin. “But it’s a tough business. They are criticized
for being too conservative. But they are very patient, and probably in the long
term that pays off.”
31 October 2008
USA Today
By Stevenson Jacobs, AP Business Writer
NEW YORK — Oil prices kept falling Friday, heading for their
biggest monthly drop since futures trading began 25 years ago on signs that a
contracting U.S. economy will suppress energy demand well into 2009.
Oil's monumental collapse — prices are down 36% for the month
and 56% from their July record — has stunned oil-producing countries while
giving cash-strapped U.S. consumers a rare dose of relief. Pump prices have
fallen by almost half since their summer peak above $4 a gallon — a huge drop
that's expected to result in more than $100 billion in annual savings for
American households.
"That's a pretty powerful stimulus to consumers," said Adam Sieminski, chief
energy economist at Deutsche Bank Global Markets in Washington.
Friday's oil decline was tied to a significantly stronger U.S. dollar. Oil
market traders often buy oil as a hedge against inflation when the dollar falls
and sell those investors when the greenback rises. The dollar has rallied in
recent weeks as the financial crisis begins hurting economies in Europe and
elsewhere, prompting investors to shift funds into the greenback as a
safe-haven.
Light, sweet crude for December delivery fell $1.35 to $64.61 a barrel on the
New York Mercantile Exchange, after earlier falling as low as $63.12.
Prices closed at $100.64 a barrel on the last trading day in September. That
gives oil the biggest monthly slide since the launch of the Nymex crude futures
contract in 1983. The previous record was a 30% drop set in February 1986.
"We're seeing a huge paradigm shift," said Jim Ritterbusch, president of energy
consultancy Ritterbusch and Associates in Galena, Ill. "We went from $100 at the
beginning of the month to around $65 today. It's quite a decline and shows how
weak the demand picture really is."
Crude hit a record price of $147.27 set on July 11.
At the pump, a gallon of regular gasoline fell 4.3 cents overnight to a national
average of $2.504, according to auto club AAA, the Oil Price Information Service
and Wright Express. Gas prices hit a record $4.114 a gallon on July 17.
Cheaper gas has been a rare bit of good news for consumers rattled by huge drops
in the stock market, rising mortgage payments and difficulty in obtaining
credit. According to Deutsche Bank research, for every dollar that comes off
pump prices, U.S. households save a $100 billion a year — money that can be
spent on other goods and services to help jolt the economy.
Deutsche Bank estimates that the $100 billion would be worth 3 million new jobs.
But even with cheaper energy, Deutsche Bank's Sieminski predicts the weak global
economy will weigh on fuel demand well into 2009 — bringing oil to a quarterly
average of $50 a barrel for that year.
OPEC and international energy agencies earlier this year predicted oil demand
would rise by 800,000 barrels a day next year, driven by growth from developing
economies like China and India.
Given the widening economic downturn, Sieminski said those figures now seem
wildly optimistic.
U.S. gross domestic product, the broadest barometer of a nation's economic
health, shrank at a 0.3% annual rate in the July-September quarter, the Commerce
Department said Thursday. It marked the worst showing for the world's largest
economy since it contracted at a 1.4% pace in the third quarter of 2001.
"We believe there will be no growth in oil demand in 2009, and we may even see a
decline," Sieminski said.
The drop in oil has come despite moves by OPEC to prop up prices. Last week, the
Organization of the Petroleum Exporting Countries announced plans to cut 1.5
million barrels of production per day at an extraordinary meeting in Vienna.
Venezuela's Oil Minister Rafael Ramirez says OPEC, which controls about 40% of
world crude oil production, will need to cut production by at least another 1
million barrels per day to boost falling prices.
Analyst believe oil price hawks like Venezuela and Iran need prices at near $100
a barrel to balance their national budgets, while Saudi Arabia and other members
would like to see prices stabilize at around $80.
Opinion, however, is mixed on whether all members of the cartel will follow
through on the cuts — or keep churning out as much crude as they can on fears
that prices will plummet more.
"A further fall in the oil price cannot be ruled out. It is difficult to predict
where the bottom could be," said David Moore, commodity strategist with
Commonwealth Bank of Australia in Sydney. "An important factor over the next few
months will be whether OPEC can achieve its output cuts. If it can that will
certainly tighten market conditions."
In other Nymex trading, gasoline futures fell 3.95 cents to $1.4275 a gallon,
while heating oil fell 2.22 cents to $1.9774 a gallon. Natural gas for December
delivery was up 5.7 cents at $6.791 per 1,000 cubic feet.
In London, Brent crude fell $2 to $61.71 a barrel on the ICE Futures exchange.
October 30, 2008
Filed at 9:01 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
HOUSTON (AP) -- Exxon Mobil Corp., the world's largest
publicly traded oil company, reported income Thursday that shattered its own
record for the biggest profit from operations by a U.S. corporation, earning
$14.83 billion in the third quarter.
Bolstered by this summer's record crude prices, the Irving, Texas-based company
said net income jumped nearly 58 percent to $2.86 a share in the July-September
period. That compares with $9.41 billion, or $1.70 a share, a year ago.
The previous record for U.S. corporate profit was set in the last quarter, when
Exxon Mobil earned $11.68 billion.
Revenue rose 35 percent to $137.7 billion.
On average, analysts expected the company to earn $2.39 per share in the latest
quarter on revenue of $131.4 billion.
Exxon Mobil's results got a boost of $1.62 billion in the most-recent quarter
from the sale of a natural gas transportation business in Germany. It also took
a special, after-tax charge of $170 million related to a punitive damages award
related to the 1989 Exxon Valdez oil spill.
Excluding those items, third-quarter earnings amounted to $13.38 billion --
nearly 15 percent above its previous profit record from the second quarter.
As expected, Exxon Mobil posted massive earnings at its exploration and
production, or upstream, arm, where net income rose 48 percent to $9.35 billion.
Higher oil and natural gas prices propelled results, even though production was
down from the third quarter a year ago.
Oil producers are coming off a quarter during which crude prices reached an
all-time high of $147.27 -- and their profits have reflected it. Crude prices,
however, have quickly fallen 50 percent from the summer's highs, and the global
economic malaise has raised questions about energy demand at least into 2009.
Some companies, especially smaller producers, are scaling back spending on new
exploration and production projects because of the uncertainty, though analysts
say that its less likely to happen at the well-heeled giants like Exxon Mobil.
Company shares rose 96 cents to $75.61 in premarket trading.
SINGAPORE (AP) — Growing evidence of a severe global economic
slowdown drove oil prices to 17-month lows below $63 a barrel Monday, as
investors brushed off a sizable OPEC output cut.
Traders were taking their cues from world markets, which
slumped again Monday with the Nikkei index in Japan closing at its lowest in 26
years, down 6.4%. Hong Kong, and European markets followed suit, closing or
trading substantially lower. The Dow Jones industrial average fell 3.6% Friday.
Light, sweet crude for December delivery declined $1.57 to $62.58 a barrel in
electronic trading on the New York Mercantile Exchange by noon in Europe, the
lowest since May 2007.
On Friday — even after the Organization of Petroleum Exporting Countries
announced a 1.5 million barrel-a-day cut — oil fell $3.69 to settle at $64.15.
Prices have plunged 57% from a record $147.27 on July 11.
"The mood is fairly negative reflecting worry about the international economic
outlook," said David Moore, a commodity strategist at Commonwealth Bank of
Australia in Sydney. "If there is further weak economic data in the U.S. or
Europe, prices could come under more downward pressure."
Iran's OPEC governor Mohammad Ali Khatibi said Sunday a reduction in production
"will be considered" at the group's next meeting in Algiers in December — a
meeting that might even be held early if necessary.
"I thought the OPEC cut was a fairly decisive act, but concerns of recession in
the major economies remain dominant," Moore said. "OPEC's cut does take a step
toward tightening the market."
Vienna's JBC Energy said prices were out of OPEC's control — for now.
"Oil is currently being driven by the present financial crisis and not by OPEC
cuts," said its research report. "As oil prices are being pressured by the
credit squeeze and a lack of liquidity, they may stay largely detached from
supply factors for several weeks to come. As a result, OPEC is currently
struggling with factors beyond its control."
Investors have been paying close attention to signs that a slowing economy and
higher gasoline prices earlier this year have hurt crude demand in the U.S., the
world's largest oil consumer.
The U.S. Department of Transportation said Friday that Americans drove 5.6%
less, or 15 billion fewer miles (24 billion fewer kilometers), in August
compared with same month a year ago — the biggest single monthly decline since
the data was first collected regularly in 1942.
"If we're looking a severe economic downturn, it's hard to say what the bottom
of any commodity price will be," Moore said.
In other Nymex trading, gasoline futures fell more than 3 cents to $1.44 a
gallon, while heating oil slipped by more than 4 cents to $1.91 a gallon.
Natural gas for November delivery fell nearly 21 cents to $6.03 per 1,000 cubic
feet.
In London, November Brent crude was down $1.75 to $60.30 a barrel on the ICE
Futures exchange.
October 17,
2008
The New York Times
By THE ASSOCIATED PRESS
Crude oil
plunged below $70 a barrel Thursday, bringing its price to less than half its
July record high after the government reported massive increases in U.S. crude
and gasoline supplies.
Investors took the news as more evidence that a global credit crisis and a shaky
economy are curbing demand for oil, which has not been this cheap in nearly 14
months.
The sell-off came despite an announcement by the OPEC cartel on Thursday that it
was moving up by almost a month an emergency meeting to discuss oil’s rapid drop
in value. The Organization of the Petroleum Exporting Countries will now meet
Oct. 24 in Vienna, Austria, instead of Nov. 18, the cartel said in a statement.
Light, sweet crude for November delivery dropped as low as $69.15 a barrel on
the New York Mercantile Exchange before gaining slightly to trade down $3.81 to
$70.73. It was crude’s lowest trading level since Aug. 22, 2007.
Crude has now fallen 53 percent since surging to a record closing price of
$145.29 in early July.
Thursday’s declines accelerated after the Energy Information Administration said
in its weekly report that crude stocks rose by 5.6 million barrels last week,
well above the 3.1 million barrel increase expected by analysts surveyed by
energy research firm Platts.
The agency also says gasoline stock rose by 7 million barrels last week, more
than double the build analysts had expected.
September 30, 2008
The New York Times
By JAD MOUAWAD
Crude oil prices dropped sharply on Monday because of concerns
that a $700 billion American bailout plan for the financial markets may fail to
revive the economy, depressing demand for petroleum products.
Crude oil futures fell as much as 7 percent to $99.80 a barrel on the New York
Mercantile Exchange. They have lost more than $20 since last Monday.
In the last two weeks, commodity markets have been shaken by the turmoil on Wall
Street while still recovering from the impact of two powerful hurricanes in the
Gulf of Mexico. After reaching $145.29 a barrel in July, prices had slumped to
nearly $90 a barrel earlier this month as the nation’s economic prospects
dimmed. But in a wild market, they spiked back up last week on the back of
tremendous uncertainty in the financial markets.
Anxiety has gripped investors once again on Monday even after Congressional
leaders said they had reached an agreement about the financial bailout plan, the
largest in history. The plan would allow the Treasury Department to buy back
troubled assets held by banks and other financial institutions.
But the news was overshadowed by fresh concerns that the financial crisis was
far from over, helping push down equity as well as commodity markets.
In the latest episode of the unfolding meltdown, Citigroup will buy the banking
operations of the Wachovia Corporation, the government said Monday. Meanwhile,
the Belgian, Dutch and Luxembourg governments partially nationalized the
European financial conglomerate Fortis, another sign that the crisis that began
because of sour home mortgages in the United States could be spreading.
Analysts at Barclays Capital said the frantic weekend negotiations that led to
the bailout agreement “appear to have failed to revive market sentiment.” As the
economic situation deteriorates, the demand for commodities, including oil, is
expected to slow.
“The outlook for global equity, interest rate and exchange rate markets has
become increasingly uncertain,” analysts at Deutsche Bank wrote in a note to
investors. “We believe commodities will be unable to escape the contagion. From
a commodity perspective our most pressing concern is to what extent the U.S.
virus spreads globally and specifically to China.”
The bank’s analysts pared their expectations for next year as oil consumption
drops because of slowing economic growth, reducing their oil and gas price
forecasts by about 20 percent for 2009.
Concerns that the crisis might be spreading to Europe helped push down the value
of the European common currency. The euro dropped against the dollar to $1.43 on
Monday from $1.46 on Friday.
The weaker economic outlook could further push down oil prices in the coming
months if demand for oil in developed countries keeps falling, according to Ben
Dell, an analyst at Bernstein Research. He expects oil consumption could fall by
1.3 million barrels a day, or 2.6 percent, in the fourth quarter this year. That
is much more than the 470,000 barrels a day drop forecast from the International
Energy Agency.
“This dynamic is similar to that of the 1980s and suggests that investors should
be increasingly concerned with the slowdown in Europe, Japan and the U.S.,” he
wrote in a note to clients.
June 24, 2008
The New York Times
By MICHAEL COOPER
FRESNO, Calif. — In the 18th century the British offered a £20,000 prize to
anyone who figured out how to calculate longitude. More recently, Netflix
offered a million dollars for improving movie recommendations on its Web site.
Now Senator John McCain is suggesting a new national prize: He said here Monday
that if elected president he would offer $300 million to anyone who could build
a better car battery.
The high cost of gasoline — a gallon of regular was selling for $4.65 at a gas
station near California State University, Fresno, where Mr. McCain spoke — has
made energy policy a big issue in this year’s presidential campaign, and barely
a day has passed recently without one of the candidates weighing in with new
energy policies, proposals and attacks on opponents.
Mr. McCain, of Arizona, alienated some environmentalists last week during a
speech in Houston when he dropped his opposition to allowing offshore drilling
for oil; this week, in a swing through California, he spoke about trying to wean
the nation from its dependence on oil. He called for improving the enforcement
of fuel economy standards, building more cars that could run on alternative
fuels, dropping the tariff on imports of sugar-based ethanol from Brazil and
offering big tax credits for nonpolluting cars.
“I further propose we inspire the ingenuity and resolve of the American people,”
Mr. McCain said, “by offering a $300 million prize for the development of a
battery package that has the size, capacity, cost and power to leapfrog the
commercially available plug-in hybrids or electric cars.”
He said the winner should deliver power at 30 percent of current costs. “That’s
one dollar, one dollar, for every man, woman and child in the U.S. — a small
price to pay for helping to break the back of our oil dependency,” he said.
The Obama campaign countered by noting that Mr. McCain had voted against
improving fuel efficiency standards in the Senate. Jason Furman, the Obama
campaign’s economic policy director, said in a conference call that Mr. McCain
had been focused on “meaningful relief for oil companies that are struggling
with record profits.”
In his speech in Fresno, Mr. McCain called for automakers to act more quickly to
build so-called flex-fuel vehicles than can run on alternative fuel. He
approvingly cited the example of Brazil, which he said had moved to building 70
percent of all new vehicles that way in just three years, and he issued a
not-so-veiled threat to automakers.
“Whether it takes a meeting with automakers during my first month in office, or
my signature on an act of Congress,” he said, “we will meet the goal of a swift
conversion of American vehicles away from oil.”
And Mr. McCain emphasized one of his differences with Mr. Obama, without
mentioning him by name, by restating his opposition to subsidies for corn-based
ethanol, which Mr. Obama supports.
“As taxpayers, we foot the bill for the enormous subsidies paid to corn
producers,” he said. “And as consumers, we pay extra at the pump because of
government barriers to cheaper products from abroad.”
Mr. McCain, who spoke against corn-based ethanol when he ran for president in
2000, said this time around that he became a supporter of it when oil grew too
expensive, but he has said he still opposes subsidies for ethanol.
While the McCain and Obama campaigns were sparring over energy, Mr. Obama was in
Albuquerque, where he focused on the economy and working women, a critical
constituency. He journeyed deep into the prosaic land of gut-level economics at
the Flying Star Café Commissary, where talk of globalization and vertical
economies yields to “how can I afford to make it through this week and the one
after that?”
Speaking to a group of women, Mr. Obama, of Illinois, was offered a glimpse into
one of the realities of the American economy: that wages for the working-class
have lagged far behind those of upper-income Americans. Some of the women at the
commissary, like Carrie Hummel, 28, told of holding down multiple jobs and still
barely being able to find the money to pay for gas, much less for her health
insurance. “You know, this life is pretty hard,” she said.
Ms. Hummel was followed by a woman who asked Mr. Obama if he would consider
waiving taxes on tips, and another who asked about the cost of college tuition,
which has risen at a rate far outstripping inflation.
Mr. Obama offered a variety of proposals, including requiring employers t0
provide seven paid sick days for all employees (he has not specified the size of
the employer) and extending the Family and Medical Leave Act to cover any
company with 25 or more employees (the act now applies to those with 50 or more
employees).
He also criticized Mr. McCain over his opposition to legislative action to help
bring wages of women up to those of men. The McCain campaign fired back, saying
the legislation to do so would have been a boon to trial lawyers, who have
supported Mr. Obama’s campaign.
When VeraSun Energy inaugurated a new ethanol processing plant last summer in
Charles City, Iowa, some of that industry’s most prominent boosters showed up.
Leaders of the National Corn Growers Association and the Renewable Fuels
Association, for instance, came to help cut the ribbon — and so did Senator
Barack Obama.
Then running far behind Senator Hillary Rodham Clinton in name recognition and
in the polls, Mr. Obama was in the midst of a campaign swing through the state
where he would eventually register his first caucus victory. And as befits a
senator from Illinois, the country’s second largest corn-producing state, he
delivered a ringing endorsement of ethanol as an alternative fuel.
Mr. Obama is running as a reformer who is seeking to reduce the influence of
special interests. But like any other politician, he has powerful constituencies
that help shape his views. And when it comes to domestic ethanol, almost all of
which is made from corn, he also has advisers and prominent supporters with
close ties to the industry at a time when energy policy is a point of sharp
contrast between the parties and their presidential candidates.
In the heart of the Corn Belt that August day, Mr. Obama argued that embracing
ethanol “ultimately helps our national security, because right now we’re sending
billions of dollars to some of the most hostile nations on earth.” America’s oil
dependence, he added, “makes it more difficult for us to shape a foreign policy
that is intelligent and is creating security for the long term.”
Nowadays, when Mr. Obama travels in farm country, he is sometimes accompanied by
his friend Tom Daschle, the former Senate majority leader from South Dakota. Mr.
Daschle now serves on the boards of three ethanol companies and works at a
Washington law firm where, according to his online job description, “he spends a
substantial amount of time providing strategic and policy advice to clients in
renewable energy.”
Mr. Obama’s lead advisor on energy and environmental issues, Jason Grumet, came
to the campaign from the National Commission on Energy Policy, a bipartisan
initiative associated with Mr. Daschle and Bob Dole, the Kansas Republican who
is also a former Senate majority leader and a big ethanol backer who had close
ties to the agribusiness giant Archer Daniels Midland.
Not long after arriving in the Senate, Mr. Obama himself briefly provoked a
controversy by flying at subsidized rates on corporate airplanes, including
twice on jets owned by Archer Daniels Midland, which is the nation’s largest
ethanol producer and is based in his home state.
Jason Furman, the Obama campaign’s economic policy director, said Mr. Obama’s
stance on ethanol was based on its merits. “That is what has always motivated
him on this issue, and will continue to determine his policy going forward,” Mr.
Furman said.
Asked if Mr. Obama brought any predisposition or bias to the ethanol debate
because he represents a corn-growing state that stands to benefit from a boom,
Mr. Furman said, “He wants to represent the United States of America, and his
policies are based on what’s best for the country.”
Mr. Daschle, a national co-chairman of the Obama campaign, said in a telephone
interview on Friday that his role advising the Obama campaign on energy matters
was limited. He said he was not a lobbyist for ethanol companies, but did speak
publicly about renewable energy options and worked “with a number of
associations and groups to orchestrate and coordinate their activities,”
including the Governors’ Ethanol Coalition.
Of Mr. Obama, Mr. Daschle said, “He has a terrific policy staff and relies
primarily on those key people to advise him on key issues, whether energy or
climate change or other things.”
Ethanol is one area in which Mr. Obama strongly disagrees with his Republican
opponent, Senator John McCain of Arizona. While both presidential candidates
emphasize the need for the United States to achieve “energy security” while also
slowing down the carbon emissions that are believed to contribute to global
warming, they offer sharply different visions of the role that ethanol, which
can be made from a variety of organic materials, should play in those efforts.
Mr. McCain advocates eliminating the multibillion-dollar annual government
subsidies that domestic ethanol has long enjoyed. As a free trade advocate, he
also opposes the 54-cent-a-gallon tariff that the United States slaps on imports
of ethanol made from sugar cane, which packs more of an energy punch than
corn-based ethanol and is cheaper to produce.
“We made a series of mistakes by not adopting a sustainable energy policy, one
of which is the subsidies for corn ethanol, which I warned in Iowa were going to
destroy the market” and contribute to inflation, Mr. McCain said this month in
an interview with a Brazilian newspaper, O Estado de São Paulo. “Besides, it is
wrong,” he added, to tax Brazilian-made sugar cane ethanol, “which is much more
efficient than corn ethanol.”
Mr. Obama, in contrast, favors the subsidies, some of which end up in the hands
of the same oil companies he says should be subjected to a windfall profits tax.
In the name of helping the United States build “energy independence,” he also
supports the tariff, which some economists say may well be illegal under the
World Trade Organization’s rules but which his advisers say is not.
Many economists, consumer advocates, environmental experts and tax groups have
been critical of corn ethanol programs as a boondoggle that benefits
agribusiness conglomerates more than small farmers. Those complaints have
intensified recently as corn prices have risen sharply in tandem with oil prices
and corn normally used for food stock has been diverted to ethanol production.
“If you want to take some of the pressure off this market, the obvious thing to
do is lower that tariff and let some Brazilian ethanol come in,” said C. Ford
Runge, an economist specializing in commodities and trade policy at the Center
for International Food and Agricultural Policy at the University of Minnesota.
“But one of the fundamental reasons biofuels policy is so out of whack with
markets and reality is that interest group politics have been so dominant in the
construction of the subsidies that support it.”
Corn ethanol generates less than two units of energy for every unit of energy
used to produce it, while the energy ratio for sugar cane is more than 8 to 1.
With lower production costs and cheaper land prices in the tropical countries
where it is grown, sugar cane is a more efficient source.
Mr. Furman said the campaign continued to examine the issue. “We want to
evaluate all our energy subsidies to make sure that taxpayers are getting their
money’s worth,” he said.
He added that Mr. Obama favored “a range of initiatives” that were aimed at
“diversification across countries and sources of energy,” including cellulosic
ethanol, and which, unlike Mr. McCain’s proposals, were specifically meant to
“reduce overall demand through conservation, new technology and improved
efficiency.”
On the campaign trail, Mr. Obama has not explained his opposition to imported
sugar cane ethanol. But in remarks last year, made as President Bush was about
to sign an ethanol cooperation agreement with his Brazilian counterpart, Mr.
Obama argued that “our country’s drive toward energy independence” could suffer
if Mr. Bush relaxed restrictions, as Mr. McCain now proposes.
“It does not serve our national and economic security to replace imported oil
with Brazilian ethanol,” he argued.
Mr. Obama does talk regularly about developing switchgrass, which flourishes in
the Midwest and Great Plains, as a source for ethanol. While the energy ratio
for switchgrass and other types of cellulosic ethanol is much greater than corn,
economists say that time-consuming investments in infrastructure would be
required to make it viable, and with corn nearing $8 a bushel, farmers have
little incentive to shift.
Ethanol industry executives and advocates have not made large donations to
either candidate for president, an examination of campaign contribution records
shows. But they have noted the difference between Mr. Obama and Mr. McCain.
Brian Jennings, a vice president of the American Coalition for Ethanol, said he
hoped that Mr. McCain, as a presidential candidate, “would take a broader view
of energy security and recognize the important role that ethanol plays.”
The candidates’ views were tested recently in the Farm Bill approved by Congress
that extended the subsidies for corn ethanol, though reducing them slightly, and
the tariffs on imported sugar cane ethanol. Because Mr. McCain and Mr. Obama
were campaigning, neither voted. But Mr. McCain said that as president he would
veto the bill, while Mr. Obama praised it.
So great is the demand for oil today — and so great the concern over rising
prices — that it would be tempting to uncritically embrace plans by major
Western oil companies to return to Iraq.
Unfortunately, the evolving deals could well rekindle understandable suspicions
in the Arab world about oil being America’s real reason for invading Iraq and
fan even more distrust and resentment among Iraq’s competing religious and
ethnic factions.
As reported by Andrew Kramer in The Times, Exxon Mobil, Shell, Total and BP —
original partners in the Iraq Petroleum Company — are in the final stages of
discussions that will let them formally re-enter Iraq’s oil market, which
expelled them 36 years ago. The contracts also include Chevron.
Iraq can certainly use the modern technology and skills these oil giants offer.
Although Iraq’s oil reserves are among the world’s largest, years of United
Nations sanctions and war have badly eroded the industry. Government officials
say they aim to increase production from 2.5 million barrels of oil a day to 3
million barrels. That is a minor increase in global terms, but with oil at $140
a barrel, it is good news for Iraqis, who need the money to rebuild their
war-torn country.
We cannot blame Baghdad for wanting to get on with exploiting the country’s
lucrative oil deposits, especially when Kurds in northern Iraq are rapidly
signing contracts to develop oil fields in their own semiautonomous region.
Still, the negotiating process pursued by Baghdad is flawed and troubling.
The contracts are being let without competitive bidding to companies that since
the American invasion have been quietly advising Iraq’s oil ministry how to
increase production. While the contracts are limited to refurbishing equipment
and technical support and last only two years, they would give these companies
an inside track on vastly more lucrative long-term deals.
Given that corruption is an acknowledged problem in Iraq’s government, the
contracts would have more legitimacy if the bidding were open to all and the
process more transparent. Iraqis must apply that standard when they let
contracts for long-term oil field development.
Also troubling is that the deals were made even though Iraq’s parliament has
failed to adopt oil and revenue sharing laws — critical political benchmarks set
by the Bush administration. That is evidence of continued deep divisions in Iraq
over whether oil should be controlled by central or regional government, whether
international oil companies should be involved in development and how the
profits should be distributed.
The United States and the oil companies must encourage Iraqi officials to make
the political compromises needed to establish in law the rules for managing
Iraq’s abundant natural resources with as much transparency as possible.
Otherwise, oil will just become one more centripetal force pulling the country
apart.
June 17,
2008
The New York Times
By THE ASSOCIATED PRESS
Oil futures
are hitting a new milestone near $140 a barrel, a dramatic surge analysts
attributed to the weakening dollar. The surge comes even despite expectations
that Saudi Arabia, the world’s biggest oil exporter, was planning to increase
its output by about a half-million barrels a day.
Light, sweet crude for July delivery rose to a trading record of $139.89 a
barrel Monday, but retreated slightly to trade up $3.45 at $138.31 a barrel on
the New York Mercantile Exchange.
The dollar fell on a weak report on New York state manufacturing activity,
analysts said. Many investors buy commodities like oil as a hedge against
inflation when the dollar falls. Also, a weaker dollar makes oil less expensive
to investors dealing in other currencies.
Many analysts believe the dollar’s protracted decline is a major factor behind
oil’s doubling in price over the last year.
Plans by Saudi Arabia to increase production could bring its output to a level
of 10 million barrels a day, which, if sustained, would be the kingdom’s highest
ever. The move was seen as a sign that the Saudis are becoming increasingly
nervous about both the political and economic effect of high oil prices.
Saudi Arabia is currently pumping 9.45 million barrels a day, which is an
increase of about 300,000 barrels from last month.
While they are reaping record profits, the Saudis are concerned that today’s
record prices might eventually damp economic growth and lead to lower oil
demand, as is already happening in the United States and other developed
countries. The current prices are also making alternative fuels more viable,
threatening the long-term prospects of the oil-based economy.
For
generations, we've taken it for granted.
But as prices soar and reserves
dwindle, the time is fast approaching when mankind will have to live without
oil.
Are we ready to confront some really inconvenient truths? Michael Savage
reports from the North Sea
Thursday,
12 June 2008
The Independent
Aberdeen heliport is heaving. Dozens of rig men are waiting to board helicopters
and begin a two-week stint in the middle of the North Sea. It appears that
business out on the rigs, known simply as "the job" in these parts, is booming.
Eventually, it's our turn to board a cramped chopper, shoulder to shoulder with
the solidly built workers who sit silently, psyching themselves up for a
fortnight surrounded by cold, crashing waves.
Two hours later, we land at a rusting rig named Alwyn, 440 kilometres off the
coast of Aberdeen. Ollie Bradshaw, the rig's burly production supervisor, meets
the new arrivals.
"What's life like offshore? Busy. Very busy," he says. He's not joking. As we
traipse around the rig's two platforms, perched 200 feet above the (thankfully)
calm waters of the North Sea, we navigate between the numerous piles of
scaffolding, timber and new equipment that take up almost every last square inch
of space. The on-board population has swollen to 250 people lately. In some
cases, three men are having to share a room, while new digs are built next to
the rig's busy helipad, where several flights land and take off each day,
delivering a conveyer belt of fresh workers – from painters and decorators to
extra scaffolders and, of course, the men whose expertise lies in harvesting
fossil fuels from beneath the sea bed.
Even in the common room, no one is standing idle – not around the television,
nor the snooker table. The on-board gym is empty. In the canteen, a few men grab
bacon rolls before heading off to start their 4pm shift. Those on an earlier
shift have just had their lunch – there's been a run on lemon tart. Yet the hive
of activity that Alwyn has become of late is not down to all the oil it is
producing. Far from it.
"Alwyn started out as an oil well and platform more than two decades ago. As oil
production has fallen, it has been adapted and changed," says Bradshaw, a man
who seems devoted to his life here in the middle of nowhere. The rig's expanding
team is having to work harder than ever to keep it going. A vast network of
underground pipes has linked it to new pockets of oil and gas – some of the
neighbouring platforms seem like they are just touching distance away. New
techniques have been used to boost the quality of the last dregs of oil coming
out of the ground. Empty reservoirs are being drained of natural gas. Now, a
major discovery of a field of natural gas has meant that, after 21 years of
work, Alwyn's creaking infrastructure is being given a facelift to keep going
for another 20 years. But it will also mean its conversion from the oil platform
it once was will be complete.
The end of Alwyn's oil well days is a familiar story in the North Sea. The rig
men may be working as hard as ever, but UK oil production has been falling
rapidly ever since 1999. In the past, that hasn't been such a problem – other
producers around the world have always been able to produce more of the black
stuff to keep the wheels of world industry lubricated. But according to some,
that may be about to change. Oil prices are so high – $137 a barrel – and
predicted by Alexey Miller, head of Gazprom, the Russian state energy giant, to
rise as high as $250 a barrel – that social tensions have begun to emerge, while
the world's leaders have been going cap in hand to oil producers, asking them to
squeeze a few more barrels out of their wells. And as prices have kept on
breaking records, an ever-growing worry looms in the background, the elephant in
the room of the oil price rise: what if they can't produce any more? What if,
this time, the oil taps really are running dry?
Worryingly, for a world reliant on the dirt-cheap energy that oil provided
throughout the last century, the idea that oil production in all nations may
soon start to decline just as in the North Sea has been seeping into the
mainstream. The "peak oil" theory – that oil production has reached its maximum
and will soon begin its decline, bringing potentially catastrophic consequences
to the modern world – no longer just comes from internet crackpots and
conspiracy theorists; now geologists, market analysts and oil prospectors
believe that this scenario is becoming reality. And within the past year, there
have been signs that the major oil companies are admitting this themselves. If
they are right, high petrol prices could be the least of the world's problems.
The idea is simple enough. Those warning against an imminent peak oil crisis –
the "peakists" – say that while the world will not totally run out of oil, all
of the oil that is easy to reach has been all but used up, meaning that
producing enough oil to meet the growing world demand is becoming an ever harder
task. Worse, we now stand at the high water mark of oil production. That means
that not only will we never be able to produce much more oil than the 87 million
barrels a day we now consume, but world oil production will actually begin to
fall very soon, causing not only ever higher prices, but also creating the
prospect of shortages, industrial upheaval, battles over ever-depleting
resources, and even an end to the modern world built upon the assumption of a
plentiful supply of cheap oil.
"A lot of people keep talking about 'this peak oil theory' – but there's nothing
theoretical about it. It's just a very obvious fact of nature," says Colin
Campbell, a geologist who searched for oil on behalf of several oil companies,
and is the high priest of the peakists. "Oil is formed in the geological past.
That means it's a finite resource. That means production begins and ends, and
passes a peak in between. So the fact that there is a peak is beyond dispute.
We've had the first half of the age of oil, which has changed the world in every
conceivable way. We now face a decline."
Campbell is in no doubt that the world's oil production is as high as it is ever
going to get. "The result of the latest update I made using industry data was
that the regular, conventional oil peaked in 2005 and if you put all the other
types in – the heavy oils, the gas liquids, the Arctic oil, the deep water
projects – I have it this year," he says, in a softly spoken, matter-of-fact
tone. "That's not cast in stone. It could slip a year or two. But I'm absolutely
confident that it's in the right area."
Whereas Campbell's fears once branded him a wacky radical, as the years have
gone by he has been joined by a growing band of industry experts who have
reached a similarly grim conclusion. One of those was an American investment
banker examining "flow rates" – the speed at which oil was being taken out of
the ground. After being asked to advise Donald Rumsfeld and George Bush on
energy policy during the 2000 election campaign, Matthew Simmons found that more
and more oil fields had begun to decline. That was because, though new
technology was helping to extract oil faster than ever before, it was also
causing the fields to run dry more quickly, too. "All of a sudden there were
fields that were declining by as much as 30 per cent per year," he says. "But I
didn't call it 'peak oil' – I didn't even know what that was back then."
Simmons came across peak oil in 2002, when he attended the first meeting of a
new group founded by Colin Campbell. Only around 45 people showed up to the
first meeting of the Association for the Study of Peak Oil (Aspo), but since
then, its findings have convinced a lot more people around the world. Aspo now
has branches in 36 countries, with Kuwait the latest wanting to found one. And
some serious analysts have also made the mental journey from dissenters to
peak-oil prophets.
"I've been on that journey," says Chris Skrebowski, who spent half his career in
the oil industry and now edits the UK oil industry's publication of record,
Petroleum Review. He admits to having been dismissive of the idea that the
world's wells were running dry. It was a visit from Campbell in 1996 that made
him change his mind. "I didn't quite believe him, but I didn't think he was the
average nutter," he says. Skrebowski began to take a look at the issue himself.
The numbers told a clear story. "You can just about struggle through to 2011, if
everything goes to plan – which, of course, it won't – but after that, the
numbers don't add up. And that's taking a reasonably conservative rate of
decline. If you wind it up to a 5 or 6 per cent annual decline, then you are at
this peak or plateau now."
One man who believes that could be the real rate of decline is the archetypal US
oilman, T Boone Pickens, otherwise known as the "Oracle of Oil". Having made a
fortune in the oil industry, Pickens now invests heavily in the oil alternatives
he believes will be necessary to fill the gap left by falling oil production.
From the window of helicopter, flying above the uninviting waves of the North
Sea, it seems hard to believe that the world could really be running low on easy
oil. Dozens of rigs pepper the vast expanse of water, their burning flares
making them look like floating candles. Spiralling wisps of smoke fill the North
Sea sky – a reminder that there is still oil churning around. Despite the
pedigree of the peakists, it's hard not to think we've heard it all before, that
it's just the usual doomsayers predicting that the oilfields would run out, and
that more will be found somewhere. But for the peakists, the North Sea is a
great case study. Its rapid decline has come despite all the advantages the
modern world could throw at it.
"The North Sea has the benefit of all the investment anybody could need," says
Campbell. "It's got the most modern technology, and it's got a political
environment that's stable. There's no reason why it would be producing less oil
than is possible, yet it has been declining at a rate of 7 per cent a year."
Perhaps even more worryingly, the last year has seen major oil companies begin
to make more noises about potential problems ahead. Foremost among them has been
head of the French oil company Total, Christophe de Margerie, who has declared
that world production will never exceed 100 billion barrels a day, a level of
demand expected in less than a decade. "The oil companies are changing their
tune," says Campbell. "They can't quite say 'peak' in so many words. They don't
want to rock the boat."
Back on dry land, in a seafood restaurant in Aberdeen, a senior oil executive
talks freely about a future. "We can try to slow the decline, but we will never
stop it," he says casually, over a plate of scallops. "All we can do is get as
much oil out of the ground as possible." Meanwhile, Colin Campbell is flirting
with official approval. He is already advising a Norwegian oil firm, and has
recently been invited to give informal presentations to executives from two of
the world's biggest oil companies. A clear momentum has been built up around
peak oil fears. For Simmons, it is the peak oil deniers that are now the ones
sounding shrill. "I daily read these shrill sounding experts who still believe
that oil should be at $40 a barrel," he says. "It's just unbelievable. It's
still cheap."
Not everyone is convinced by the peak oil theory, though. This week, The
Independent reported that, according to Richard Pike, a former oil industry man,
now chief executive of the Royal Society of Chemistry, there is more than twice
as much oil in the ground than producers claim. But the most notable peak oil
refusnik is the International Energy Agency (IEA), the oil supply watchdog set
up by the world's richest nations. It has said that not only is the world not
running out of oil, but that production will continue to match the 135 million
barrels a day that is forecast to be needed by 2050. It says that while
conventional sources of oil may only provide around 92 million barrels a day of
that, investment in Saudi Arabia's fields and the growth of new sources of oil
will provide the rest.
To the peakists, these standard oil industry ripostes are starting to wear a
little thin, and have been damaged by the crashing and burning of some great
white hopes. Not a single barrel of commercially viable shale oil, made from
oil-rich sedimentary rock, has yet been produced. Oil made from tar sands found
in northern Canada is near the top of the list of innovative sources of oil, but
even the oil companies themselves admit that the amount of energy currently
needed to produce a single barrel of it makes it very inefficient. And while
drilling into ever-deeper waters might keep world production on its current
plateau, the peakists say the days of "easy oil" are over.
As for the comforting idea that Saudi Arabia could simply turn up its taps and
produce far more oil if it felt like it – the preferred belief of President Bush
and Gordon Brown – the peakists have some pretty big problems with that, too.
"The one thing that made peak oil a bogus issue was the supposedly proven fact
that in the Middle East, we had 200 years of oil supply," says Simmons. "Because
of that, we obviously couldn't have peaked. I'd just assumed it had to be true.
Then I started doing my research." After poring over more than 200 technical
papers, he made the grim conclusion that, just like elsewhere, production in
Saudi Arabia was either at or very near its peak.
And even the conservative estimates of the IEA have not been unaffected by the
spectre of peak oil. It has decided to review how it sources its data on oil
reserves, which is widely expected to lead to a lowering of its predictions of
future oil supplies when it publishes its overview of the industry in November.
If it, too, reveals that the days of free flowing oil could be over, the halls
of power might begin to take notice.
None of this will make any difference to life on the Alwyn rig in the near
future. For the next 20 years, it will be producing natural gas, and making
low-grade oil from some of it. "We'll be here until every last drop of oil is
out of the ground," Ollie Bradshaw reassures me.
But unlike Alwyn, more rigs will be decommissioned than refurbished if the peak
oil theorists turn out to be right – and they warn that the effects on the world
could be dramatic.
A world without plentiful oil, as described by the peakists, looks very
different from today's. The peakists are in no doubt about the aspect of modern
living that would have to change. With transport soaking up the vast majority of
the world's oil, they maintain that our addiction to the car will have to go.
According to Chris Skrebowski, large-scale electrification will be needed in all
vehicles, perhaps with pylons placed down motorways to provide power.
Diesel-powered public transport needs to be replaced with electric trains,
trams, and trolley buses. That would create breathing space to make more
profound societal changes, such as a growth of working from home. Matthew
Simmons also sees the current global economy soon becoming unsustainable. "Local
farms are now coming back," he says. "We have all the technology in place to do
that."
That's just for starters. According to Campbell, a wholesale change in the
western lifestyle will be needed a little further down the road. "Cities will
face massive challenges," he says. "By the end of the century, when there really
isn't very much oil left, the world will be a very different one – much more
rural, probably with fewer people. It's a sort of doomsday message, but in some
ways, it's just a change from the modern mindset. There are people in the world
who live a simple life like that and are very happy." But that's nothing
compared with what could happen if we attempt to carry on regardless with
ever-growing oil consumption. "If we don't make changes, we're going to have a
resource war and blow ourselves up," says Simmons. "I think that would be a
really inconvenient way to end the world."
So will the end of the oil age herald in a new dark age? Are we doomed to go
back to sheltering in mud huts and living off a diet of turnips and water? Not
necessarily. Thankfully, other peakists are optimistic that we can cope with a
world without such vast quantities of cheap oil – if we act now. "Humanity is
very ingenious," says Skrebowski. "But at the moment, it doesn't yet see a
crisis. We're just acting like a spoilt child who has had its lollipop taken
away. At some point, some politician has got to come out and state clearly that
the world is going to be different. It's not the end of the world, but we're all
going to have to change the way we do things. And the sooner we get on with it,
the better. The anticipation is probably worse than the reality."
Monday, 9
June 2008
The Independent
By Steve Connor, Science Editor
There is more than twice as much oil in the ground as major producers say,
according to a former industry adviser who claims there is widespread
misunderstanding of the way proven reserves are calculated.
Although it is widely assumed that the world has reached a point where oil
production has peaked and proven reserves have sunk to roughly half of original
amounts, this idea is based on flawed thinking, said Richard Pike, a former oil
industry man who is now chief executive of the Royal Society of Chemistry.
Current estimates suggest there are 1,200 billion barrels of proven global
reserves, but the industry's internal figures suggest this amounts to less than
half of what actually exists.
The misconception has helped boost oil prices to an all-time high, sending
jitters through the market and prompting calls for oil-producing nations to
increase supply to push down costs.
Flying into Japan for a summit two days after prices reached a record $139 a
barrel, energy ministers from the G8 countries yesterday discussed an action
plan to ease the crisis.
Explaining why the published estimates of proven global reserves are less than
half the true amount, Dr Pike said there was anecdotal evidence that big oil
producers were glad to go along with under-reporting of proven reserves to help
maintain oil's high price. "Part of the oil industry is perfectly familiar with
the way oil reserves are underestimated, but the decision makers in both the
companies and the countries are not exposed to the reasons why proven oil
reserves are bigger than they are said to be," he said.
Dr Pike's assessment does not include unexplored oilfields, those yet to be
discovered or those deemed too uneconomic to exploit.
The environmental implications of his analysis, based on more than 30 years
inside the industry, will alarm environmentalists who have exploited the concept
of peak oil to press the urgency of the need to find greener alternatives.
"The bad news is that by underestimating proven oil reserves we have been lulled
into a false sense of security in terms of environmental issues, because it
suggests we will have to find alternatives to fossil fuels in a few decades,"
said Dr Pike. "We should not be surprised if oil dominates well into the
twenty-second century. It highlights a major error in energy and environmental
planning – we are dramatically underestimating the challenge facing us," he
said.
Proven oil reserves are likely to be far larger than reported because of the way
the capacity of oilfields is estimated and how those estimates are added to form
the proven reserves of a company or a country. Companies add the estimated
capacity of oil fields in a simple arithmetic manner to get proven oil reserves.
This gives a deliberately conservative total deemed suitable for shareholders
who do not want proven reserves hyped, Dr Pike said.
However, mathematically it is more accurate to add the proven oil capacity of
individual fields in a probabilistic manner based on the bell-shaped statistical
curve used to estimate the proven, probable and possible reserves of each field.
This way, the final capacity is typically more than twice that of simple,
arithmetic addition, Dr Pike said. "The same also goes for natural gas because
these fields are being estimated in much the same way. The world is understating
the environmental challenge and appears unprepared for the difficult compromises
that will have to be made."
Jeremy Leggett, author of Half Gone, a book on peak oil, is not convinced that
Dr Pike is right. "The flow rates from the existing projects are the key.
Capacity coming on stream falls fast beyond 2011," Dr Leggett said. "On top of
that, if the big old fields begin collapsing, the descent in supply will hit the
world very hard."
Oil prices
had their biggest gains ever on Friday, jumping nearly $11 to a new record above
$138 a barrel, after a senior Israeli politician raised the specter of an attack
on Iran and the dollar fell sharply against the euro.
The unprecedented gains on Friday capped a second day of strong gains on energy
markets, and fueled suspicions that commodities might be caught in a speculative
bubble.
Oil futures surged $10.75, or 8 percent, to $138.54 a barrel on the New York
Mercantile Exchange. The record gain followed a jump of 5.5 percent on Thursday,
bringing total two-day gains to $16 a barrel.
Stocks fell sharply. The Dow Jones industrials fell 323.97 points, or 2.53
percent, in midday trading. Chevron Corp. was the only stock that rose on the
blue-chip index.
“This market is going to shoot itself in the foot,” said Adam Robinson, an
analyst at Lehman Brothers. “It is searching for a price that will build a
safety cushion in the system — either as inventories or as spare capacity. But
this takes time. The market has gotten extremely impatient and is not willing to
wait.”
Even as uncertainties abound about the fundamentals of the market, geopolitical
tensions in the Middle East regained center stage after Israel’s transportation
minister, Shaul Mofaz, said Friday that an attack on Iran’s nuclear sites looked
“unavoidable.” Iran is the second-largest oil producer within the OPEC cartel
and any interruptions in its exports could push prices higher levels.
“The return of the Iranian risk premium calls for a careful assessment of the
potential oil supply impact of military strikes on Iran,” said Antoine Halff, an
analyst at Newedge, an energy broker.
The strong volatility in energy markets in recent weeks have continued to puzzle
investors and traders. Prices keep rising despite a lack of shortages in the
market, and strong evidence of lower consumption in industrialized countries.
But investors seem to be caught in a bullish mood, focusing instead on perceived
risks to future oil supplies and continued growth in oil demand from emerging
economies that subsidize fuels.
The latest jump in oil prices also came as the dollar lost almost 1 percent
against the euro amid bleak economic news that fanned recession fears on Friday.
The unemployment rate surged to 5.5 percent last month, the government said, the
biggest increase in more than two decades.
Investors reacted to the latest forecast by a large Wall Street bank that oil
prices would spike to $150 a barrel in the next month because of strong demand
from Asian economies. Morgan Stanley said “an unprecedented share” of Middle
East oil exports are headed to Asia.
Some analysts also said that the threat of a strike by Chevron’s workers in
Nigeria could lead to “considerable” shutdowns of Nigerian production. A similar
strike by Exxon Mobil workers last April, which lasted a week, reduced Nigerian
output by 800,000 barrels a day, or nearly a third of the country’s daily
exports.
A strike might delay the start of Chevron’s 250,000 barrels-a-day Agbami
project, the country’s largest offshore venture, which is slated for June 15.
One view that has been gaining ground in recent months is that the commodity
market is caught in a speculative bubble akin to the housing or technology
bubble of the late 1990s. The notion is buffered by the fact the oil prices have
doubled in 12 months despite a slowing economy.
That theory was raised by politicians in Washington and a slew of OPEC
producers, who blame speculators for the staggering rally in oil prices.
Speaking before Congress recently, George Soros, a prominent hedge fund
investor, said the current oil markets presented some characteristics of a
bubble.
“I find commodity index buying eerily reminiscent of a similar craze for
portfolio insurance, which led to the stock market crash of 1987,” Mr. Soros
said earlier this week. But he cautioned that an oil market crash was not
imminent. “The danger currently comes from the other direction. The rise in oil
prices aggravates the prospects for a recession.”
Jeffrey Harris, the chief economist at the Commodity Futures Trading Commission,
who was speaking before another Senate committee last month, said he saw no
evidence of a speculative bubble in the commodity market. Instead, Mr. Harris
pointed out to a confluence of trends that have contributed to the oil price
rally, including a weak dollar, strong energy demand from emerging-market
economies, and political tensions in oil-producing countries.
“Simply put, the economic data shows that overall commodity price levels,
including agricultural commodity and energy futures prices, are being driven by
powerful fundamental economic forces and the laws of supply and demand,” Mr.
Harris said. “Together these fundamental economic factors have formed a ‘perfect
storm’ that is causing significant upward pressures on futures prices across the
board.”
Oil prices had been weakening in recent days but reversed dramatically after the
president of the European Central Bank, Jean-Claude Trichet, suggested on
Thursday that the bank might raise interest rates. That pushed up the euro
against the dollar and prompted investors to buy into commodities to hedge
against the weaker American currency.
Gasoline prices have also been rising steadily. American drivers are now paying
an average of $3.99 for a gallon of gasoline nationwide, according to AAA, the
automobile group. In many parts of the country, like California, Connecticut and
New York, consumers are already paying well over $4. Diesel costs $4.76 a gallon
on average.
“I don’t know how else to say it, this is not a bubble,” Jan Stuart, global oil
economist at UBS, said. “I think this is real. There is a whole bunch of
commercial buyers out there who are spooked and are buying. You are an airline,
right now, you’re scared. But I don’t see who would buy at these prices unless
they need to.”
(Reuters) -
U.S. crude oil hit an all-time high of $120.21 a barrel on Monday.
Robust demand for crude and a weak dollar have fuelled the rally from a dip
below $50 at the start of 2007.
Adjusted for inflation, oil is now above the $101.70 peak hit in April 1980,
according to the International Energy Agency, a year after the Iranian
revolution.
DOLLAR WEAKNESS
The fall in the value of the dollar against other major currencies has helped
drive buying across commodities as investors view dollar assets as relatively
cheap.
It has also reduced the purchasing power of OPEC's revenues and increased the
purchasing power of some non-dollar consumers.
OPEC oil ministers have noted that although prices are rising to record nominal
levels, inflation and the dollar have softened the impact.
Some analysts say investors have been using oil as a hedge against the weaker
dollar.
FUNDS
Since the Federal Reserve cut U.S. interest rates in mid-August last year and
central banks pumped billions of dollars into financial markets to ease a credit
crunch, oil and gold have risen.
Investment flows from pension and hedge funds into commodities including oil
have boomed, as has speculative trading. At the same time, the credit crunch has
brought some other markets, such as the U.S. asset-backed commercial paper
market, to a virtual standstill.
Some of that money has found its way into energy and commodities, analysts say.
DEMAND
While previous price spikes have been triggered by supply disruptions, demand
from top consumers the United States and China is a main driver of the current
rally.
Global demand growth has slowed after a surge in 2004 but is still rising and
higher prices have so far had a limited effect on economic growth.
Analysts say the world is coping with high nominal prices because, adjusted for
exchange rates and inflation, they have been until now lower than during
previous price spikes and some economies have become less energy intensive.
OPEC SUPPLY RESTRAINT
The Organization of the Petroleum Exporting Countries, source of more than a
third of the world's oil, started to reduce oil output in late 2006 to stem a
fall in prices.
Fewer OPEC barrels entering the market helped propel the rally and consumer
nations led by the International Energy Agency have urged OPEC to pump more oil.
At its meetings since December, OPEC has agreed to leave output unchanged,
saying there is enough crude in the market. It next meets formally on September
9.
Few in the group believe there is much it can do to tame a market it says defies
logic.
NIGERIA
Supply of crude from Nigeria, the world's eighth-largest oil exporter, has been
cut since February 2006 because of militant attacks on the country's oil
industry.
Oil companies and trading sources have detailed about a million bpd of shut
Nigerian production due to militant attacks and sabotage.
IRAN
Oil consumers are concerned about supply disruption from Iran, the world's
fourth-biggest exporter, which is locked in a dispute with the West over its
nuclear program.
Western governments suspect Iran is using its civilian nuclear program as a
cover to develop nuclear weapons. Iran denies this, saying it wants nuclear
power to make electricity.
IRAQ
Iraq is struggling to get its oil industry back on its feet after decades of
wars, sanctions and underinvestment.
Exports of Kirkuk crude from the country's north are stabilizing as the system
recovers from technical problems that had mostly idled the pipeline since the
U.S.-led invasion of Iraq in March 2003.
REFINERY BOTTLENECKS
Refiners in the United States, the world's top gas guzzler, struggled with
unexpected outages which have drained inventories.
Oil is becoming scarcer and harder to produce. Several former big areas of oil
production are in decline while other top oil-producing countries, including
Nigeria, Russia, Saudi Arabia, Iran and Venezuela, are either unwilling or
unable to lift production. Chinese demand is expected to more than double by
2030. Hedge funds and investment banks have been placing big bets that oil
prices will continue to rise, amplifying the volatility in prices.
Is petrol rising in tandem with oil?
In general, yes, although there tends to be a time lag of four to six weeks
between increases in global crude prices and the price on forecourts.
Is the price pressure the same for diesel and unleaded petrol?
Because of the different components that make up the two, the pressures are
slightly different. Overall, diesel is in shorter supply than petrol in Europe
as gasoil, which goes into diesel, is used extensively for heating on the
Continent. The increase in the number of diesel cars has also increased demand
for diesel.
Is the Government cashing in?
Revenue from fuel duties and taxes over the past decade has increased in line
with rising fuel costs and increased production. If the Government increases
fuel duty, as is expected widely, later this year it would boost revenue by
between £500 million and £600 million.
What can the Government do?
The Government has little influence on global crude prices. But cutting or
freezing fuel duty is possible.
Is the price rise inexorable?
The head of Opec and Goldman Sachs have said that prices could rise to $200 per
barrel but other industry players have said that they are baffled by current
prices because, despite the pressures in the market, there is still sufficient
oil to meet global demand. High prices are also stimulating a frenzy of
investment in new fields previously considered too small, expensive or
geologically challenging to extract commercially. This could have a dampening
impact on oil prices when more of these enter production. But production simply
cannot continue to grow indefinitely. By 2035 the world will use more than twice
as much energy as it does today and demand for oil could rise from 85 million
barrels a day to more than 120 million barrels.
How do the oil giants justify profits?
These are global companies with huge investment requirements. Shell invested $8
billion in the three months ended March 31. Costs in the industry are also
thought to be rising at about 20 per cent per year.
Are biofuels the answer?
The EU has called for 10 per cent of all fuel to come from biofuels by 2020 but
they seem to be creating as many problems as they solve by hindering food
production and causing deforestation.
What should Opec do?
It is unlikely to agree to boost its production soon. It argues that speculators
have more influence over the market than it does.
Setting an
all-time record, oil prices rose to nearly $104 a barrel on Monday morning,
exceeding their inflation-adjusted high reached in the early 1980s during the
second oil shock.
Oil futures rose as much as $2.11 to $103.95 on the New York Mercantile
Exchange. That level tops the record set in April 1980 of $39.50 a barrel, which
would translate to $103.76 a barrel in today’s money.
The latest surge in oil prices is taking place as investors seek refuge in
commodities to offset a slowing economy and declines in the dollar, as well as
to hedge against inflation.
The dollar fell to its lowest level in three years against the yen on Monday. It
also dropped to a record $1.5274 in early New York trading against the euro
following steep declines last week.
Today’s record oil prices are markedly different from the energy crises of the
1970s and 1980s, which were brought about by sudden interruptions in oil
supplies.
Since the year 2000, oil prices have more than quadrupled as strong growth in
demand from the United States and Asia outstripped the ability of oil producers
to increase their output.
Other energy futures also rallied on Monday. Heating oil futures jumped 6.06
cents to $2.8675 a gallon, while gasoline futures rose 5.65 cents to $2.7264 a
gallon. Natural gas gained 20 cents to $9.566 per thousand cubic feet.
In London, Brent crude futures rose $2.07 to $102.17 a barrel on the ICE Futures
exchange.
The OPEC oil cartel meets on Wednesday and is expected to leave its production
levels unchanged. The oil producing group had suggested last month that it might
curb production soon to make up for a seasonal decline in oil demand.
But with oil prices at their current levels, analysts said members of the
Organization of the Petroleum Exporting Countries will find it politically
difficult to curb their output at this time.
March 3, 2008
Filed at 10:19 a.m. ET
By THE ASSOCIATED PRESS
The New York Times
NEW YORK (AP) -- Oil prices surged to a new record high Monday as the dollar
weakened to another low against the euro.
Light, sweet crude for April delivery rose $1.93 to $103.77 on the New York
Mercantile Exchange after earlier rising as high as $103.95. That's higher than
the price of $103.76 that many analysts believe oil hit in 1980, when adjusted
for inflation into 2008 dollars.
Oil's most recent run into record territory has been driven by the greenback's
slump against other world currencies. Crude futures offer a hedge against a
falling dollar, and oil futures bought and sold in dollars are more attractive
to foreign investors when the dollar is falling.
Oil isn't the only commodity rising on the dollar's weakness -- gold, copper and
wheat are among the other commodities that have rallied in recent weeks as the
dollar has fallen.
''It's coming down to another commodity price rally,'' said Phil Flynn, an
analyst at Alaron Trading Corp., in Chicago.
Other energy futures also rallied Monday. In other Nymex trading, April heating
oil futures jumped 6.06 cents to $2.8675 a gallon, and April gasoline futures
rose 5.65 cents to $2.7264 a gallon. April natural gas futures gained 20 cents
to $9.566 per 1,000 cubic feet.
In London, Brent crude futures rose $2.07 to $102.17 a barrel on the ICE Futures
exchange.
November 28, 2007
The New York Times
By STEVEN R. WEISMAN
WASHINGTON, Nov. 27 — Flush with petrodollars, oil-producing countries have
embarked on a global shopping spree.
With a bold outlay of $7.5 billion, the Abu Dhabi Investment Authority is about
to become one of the largest shareholders in Citigroup.
The bank had already experienced the petrodollar’s power this month when another
major shareholder, Prince Walid bin Talal of Saudi Arabia, cleared the way for
the ouster of its chief executive, Charles O. Prince III.
The Dubai stock exchange, meanwhile, is negotiating for 20 percent of a newly
merged company that includes Nasdaq and the operator of stock markets in the
Nordic region. Qatar, like Dubai a sheikdom in the Persian Gulf, might compete
in that deal.
In late October, Dubai, which has little oil but is part of the region’s energy
economy, bought part of Och-Ziff Capital Management, a hedge fund in New York.
Abu Dhabi this month invested in Advanced Micro Devices, the chip maker, and in
September bought into the Carlyle Group, a private equity giant.
Experts estimate that oil-rich nations have a $4 trillion cache of petrodollar
investments around the world. And with oil prices likely to remain in the
stratosphere, that number could increase rapidly.
In 2000, OPEC countries earned $243 billion from oil exports, according to
Cambridge Energy Research Associates. For all of 2007 the estimate was more than
$688 billion, but that did not include the last two months of price spikes.
“If you look at gulf countries, they have a total common economy that is about
the size of the Netherlands,” said Edward L. Morse, chief energy economist of
Lehman Brothers. “These are tiny countries, but they have to place collectively
over $5 billion a week from their oil revenues. It’s not an easy thing to do.”
The explosion in investment has set up some of its own cross-currents. While the
recent decline in the value of the dollar is making investment in the United
States cheaper, many investors are holding back out of fear that the dollar will
decline further, diminishing the worth of their dollar holdings.
Many oil investors are also worried about a potential political reaction in the
United States similar to the furor of last year when Dubai tried to acquire a
company that operates American ports. European leaders, at the same time, worry
that Russia is using its oil revenues to snatch up pipelines and other energy
infrastructure in their region.
Such concerns seem to be driving investments to other parts of the world, many
analysts say.
“The investments are diversifying outside the United States, though the U.S.
still has the bulk of it,” said Diana Farrell, director of the McKinsey Global
Institute, a research arm of the McKinsey consulting firm, which calculated in
October that petrodollar investments reached $3.4 trillion to $3.8 trillion at
the end of 2006.
“Europe is a prime target,” she added, “but at least 25 percent of foreign
investments from the Persian Gulf are in Asia, the Middle East and North
Africa.”
Though oil-producing countries have been looking at investments in the West
since the 1970s, their strategies back then were largely confined to safe assets
with a low return, like United States Treasury debt.
By 2001, with the collapse in oil prices, many of the oil exporters had depleted
their dollar reserves, economists say.
But the boom in oil prices in the last five years has changed all that. It has
persuaded oil producers to set up or expand “sovereign wealth funds” as vehicles
to invest far more aggressively in the West, in their own economies and in
emerging markets.
Other petrodollar investments are made through government-owned corporations,
corporations and individuals like Prince Walid, who owns stakes not only in
Citigroup but also News Corporation, Procter & Gamble, Hewlett-Packard, PepsiCo,
Time Warner and Walt Disney.
The oil-rich nations are also investing more in real estate, private equity
funds and hedge funds, analysts say, and increasingly they are investing the
money on their own, bypassing the major financial institutions of the United
States and Europe.
“The oil-producing countries simply cannot absorb the amount of wealth they are
generating,” said J. Robinson West, chairman of PFC Energy. “We are seeing a
transfer of wealth of historic dimensions. It is not just Qatar and Abu Dhabi.
Investment funds are being set up in places like Kazakhstan and Equatorial
Guinea.”
Precise figures of the global picture in petrodollars are not easy to come by,
in part because the big investors in the Persian Gulf and elsewhere are not
obliged to disclose their portfolios or activities.
The lack of transparency is a problem to leaders of Western industrial
economies. In October, Henry M. Paulson Jr., Treasury secretary of the United
States, and the finance ministers of other major industrial democracies called
for an international code of “best practices” by cross-border investors
requiring greater disclosure of assets and actions.
The petrodollar era has benefited the world economy, economists say, notably by
enhancing liquidity at a time when foreign currency reserves of export giants in
Asia are also making the world flush with cash.
Recently Ben S. Bernanke, chairman of the Federal Reserve, has spoken of a
“global savings glut” that has lowered interest rates worldwide. Ms. Farrell, of
the McKinsey Institute, estimates that petrodollars may have kept American
interest rates three-quarters of a percentage point lower than they would
otherwise be, a direct benefit to American consumers.
But the flood of investments is also causing problems, like overheated economies
and asset bubbles in oil-rich nations.
“The gulf countries are pouring credit into their economies, adding to excess
liquidity,” said Charles H. Dallara, managing director of the International
Institute of Finance, an organization of leading private financial companies.
“It is eroding the earning power of local citizens and becoming a source of
economic instability over time.”
Some investment deals have fallen through, to the embarrassment of all sides.
This year Qatar sought to do a leveraged buyout of a retailer in Britain, the J
Sainsbury supermarket chain.
After starting the bid in July, Qatar faced concerns from unions, the Sainsbury
family and others over whether the Qataris wanted Britain’s third-largest
grocery chain just for the underlying real estate and whether the company could
survive the amount of debt being incurred. The deal fell through three weeks
ago, , when Qatar said that the global credit squeeze made the borrowing costs
too high.
The decline in the dollar has also introduced new uncertainties into predicting
petrodollar investment patterns. C. Fred Bergsten, director of the Peterson
Institute of International Economics, said that while some countries in the gulf
were trying to diversify their investments away from the dollar and into euros
and pounds sterling, the Saudis were trying to quell that trend out of fear that
the dollar will decline further and diminishing the value of their assets.
A measure of discord over the dollar was apparent at the OPEC meeting in Saudi
Arabia this month. Iran and Venezuela, the two biggest political foes of the
United States among the oil producers, complained that oil was being sold in a
currency whose value was eroding by the day.
(Reuters) - U.S. crude oil hit a record high of $99.29 a barrel on Wednesday.
Strong demand for crude and a weak dollar have fuelled the rally from a dip
below $50 at the start of the year.
Adjusted for inflation, oil is still below the $101.70 peak hit in April 1980,
according to the International Energy Agency, a year after the Iranian
revolution.
DOLLAR WEAKNESS
The fall in the value of the dollar against other major currencies has helped
drive buying across commodities as investors view dollar assets as relatively
cheap.
It has also reduced the purchasing power of OPEC's revenues and increased the
purchasing power of some non-dollar consumers.
OPEC oil ministers have noted that although prices are rising to record nominal
levels, inflation and the dollar have softened the impact.
Some analysts say investors have been using oil as a hedge against the weaker
dollar.
FUNDS
Since the Federal Reserve cut U.S. interest rates in mid-August and central
banks pumped billions of dollars into financial markets to ease a credit crunch,
oil and gold have risen.
Investment flows from pension and hedge funds into commodities including oil
have boomed, as has speculative trading. At the same time, the credit crunch has
brought some other markets, such as the U.S. asset-backed commercial paper
market, to a virtual standstill.
Some of that money has found its way into energy and commodities, analysts say.
DEMAND
While previous price spikes have been triggered by supply disruptions, demand
from top consumers the United States and China is a main driver of the current
rally.
Global demand growth has slowed after a surge in 2004 but is still rising and
higher prices have so far had a very limited effect on economic growth.
Analysts say the world is coping well with high nominal prices because, adjusted
for exchange rates and inflation, they are lower than during previous price
spikes and some economies have become less energy intensive.
OPEC SUPPLY RESTRAINT
The Organization of the Petroleum Exporting Countries, source of more than a
third of the world's oil, started to reduce oil output in late 2006 to stem a
fall in prices.
Fewer OPEC barrels entering the market helped propel this year's rally and
consumer nations led by the International Energy Agency for months urged OPEC to
pump more oil.
At a meeting in September, OPEC agreed to increase oil output by 500,000 barrels
per day from November 1.
Few in the group believe there is much they can do to tame a market they say
defies logic.
NIGERIA
Supply of crude from Nigeria, the world's eighth-largest oil exporter, has been
cut since February 2006 because of militant attacks on the country's oil
industry.
Oil companies have detailed about 547,000 bpd of shut Nigerian production due to
militant attacks and sabotage.
IRAN
Oil consumers are concerned about supply disruption from Iran, the world's
fourth-biggest exporter, which is locked in a dispute with the West over its
nuclear program.
Western governments suspect Iran is using its civilian nuclear program as a
cover to develop nuclear weapons. Iran denies this, saying it wants nuclear
power to make electricity.
On October 25, Washington slapped new sanctions on Iran and accused its
Revolutionary Guard of spreading weapons of mass destruction.
IRAQ
Iraq is struggling to get its oil industry back on its feet after decades of
wars, sanctions and underinvestment.
Exports of Kirkuk crude from the country's north are sporadic as sabotage and
technical problems have mostly idled the pipeline since the U.S.-led invasion of
Iraq in March 2003, preventing exports returning to the pre-invasion rate.
REFINERY BOTTLENECKS
Refiners in the United States, the world's top gas guzzler, struggled with
unexpected outages which drained inventories ahead of the summer, when motor
fuel demand peaks.
Oil futures jumped to a record $97 a barrel Tuesday after bombings in
Afghanistan and an attack on a Yemeni oil pipeline compounded supply concerns
that have driven crude prices higher in recent weeks.
*Light, sweet crude for December delivery was up$2.80 to $96.78 a barrel on
the New York Mercantile Exchange Tuesday after rising as high as $97.
Other energy futures also rose Tuesday. December gasoline futures jumped 6.79
cents to $2.449 a gallon on the Nymex, while December heating oil futures added
6.14 cents to $2.6053 a gallon.
Natural gas for December delivery rose 12.4 cents to $8.126 per 1,000 cubic feet
on the Nymex.
In London, Brent crude rose $2.54 to $93.03 a barrel on the ICE Futures
exchange. A number of North Sea oil platforms were being evacuated Tuesday in
advance of expected severe weather.
Market participants expect the U.S. Energy Department to report Wednesday that
oil inventories fell last week, in part because of a suspension of output at
Mexico's state oil company Petroleos Mexicanos, a major crude exporter to the
United States.
Last week, crude futures jumped more than $4 after figures showed a sharp,
unexpected drop in U.S. crude inventories for the second week in a row.
"The oil market is really supported by the tight inventories in the U.S. market
and the general expectations for the inventory report this week are that the
crude inventories will likely fall," said Victor Shum of Purvin & Gertz in
Singapore.
Analysts believe some traders and investors will try to push oil prices to the
psychologically important $100-a-barrel level this week. Crude prices are within
the range of inflation-adjusted highs set in early 1980. Depending on the how
the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or
more today.
"While it is on the uptrend, there is a tremendous amount of volatility," Shum
said. "It's not unusual to see prices change in a range of $2 in a day."
Crude stocks are expected to fall 1.6 million barrels, according to the average
forecast in a Dow Jones Newswires survey of energy analysts. Gasoline
inventories are expected to increase by 200,000 barrels, while distillates,
which include heating oil and diesel fuel, are likely to have fallen 500,000
barrels, the survey showed.
"With the disruption to Mexican crude oil exports, it's to be expected that U.S.
crude imports will remain on the low side in tomorrow's DOE report and keep U.S.
crude oil stocks under pressure," said Olivier Jakob at Petromatrix in
Switzerland.
The Nymex crude contract had fallen $1.95 to settle at $93.98 a barrel Monday,
weighed down by news of more Citigroup write-downs, the release of Turkish
soldiers that had been captured by Kurdish militants and a drop in U.S. share
prices.
Traders and analysts said the pullback was a result of speculators locking in
recent gains, rather than a change in sentiment that could threaten the
continuation of crude's 15% runup in the past month.
Contributing: Reuters;
Associated Press Writer Gillian Wong
in Singapore
Oil prices hit a record
$97 a barrel, UT, 6.11.2007,
November 1,
2007
Filed at 7:15 a.m. ET
By THE ASSOCIATED PRESS
The New York Times
SINGAPORE
(AP) -- The price of oil rose to a new record above $96 a barrel Thursday after
a surprise drop in U.S. crude stockpiles raised concerns about supplies for
coming winter demand. Other energy futures also gained.
It was the second week in a row the U.S. Energy Information Administration
reported a sharp and unexpected drop in oil inventories.
''The decline in U.S. crude oil inventories has been a key driver of oil
prices,'' said David Moore, commodity strategist at the Commonwealth Bank of
Australia in Sydney.
Light, sweet crude for December delivery rose as high as $96.24 a barrel in
electronic trading on the New York Mercantile Exchange by midafternoon in
Singapore before dropping back to $95.59 a barrel.
Crude prices have reached inflation-adjusted highs set in early 1980. Depending
on the how the adjustment is calculated, $38 a barrel then would be worth $96 to
$101 or more today.
''We are stepping into an unknown area. Nobody wants to sell (given the fear of
a) further rise,'' broker Ken Hasegawa of Fimat Japan told Dow Jones Newswires.
The December Nymex crude contract rose $4.15 Wednesday to $94.53 a barrel -- the
highest-ever settlement.
December Brent crude futures also surged to a new trading record of $91.63 a
barrel Thursday on the ICE futures exchange in London, up $1 from the previous
session, before retreating to $91.37.
In its weekly inventory report, the U.S. Energy Department's Energy Information
Administration said oil supplies fell by 3.9 million barrels last week. Analysts
surveyed by Dow Jones Newswires, on average, had expected an increase of 100,000
barrels.
''The report acted to solidify concerns about the possibility of tightening
market conditions ahead of the northern winter,'' Moore said.
Much of that decline was due to a big drop in crude supplies at a closely
watched oil terminal in Cushing, Oklahoma.
Cushing supplies have been under pressure in recent months due to differences in
the price between front-month oil contracts and those for delivery in future
months. This price difference, or spread, has given storage tank owners a
financial incentive to sell their oil, rather than hold it in inventory.
Analysts have also blamed falling Cushing supplies, in part, for the rally in
which oil prices have jumped 35 percent since August.
The EIA also reported that refinery activity fell by 0.9 percentage point last
week to 86.2 percent of capacity. Analysts had expected an increase of 0.5
percentage point.
Supplies of gasoline rose last week by 1.3 million barrels. Analysts expected a
400,000-barrel decrease.
And inventories of distillates, which include heating oil and diesel fuel, rose
by 800,000 barrels. Analysts had expected a 1 million barrel decrease.
The U.S. Federal Reserve's move to cut interest rates by a quarter point also
supported prices.
Interest rate cuts generally support oil prices because they tend to send the
U.S. dollar downward; the dollar is already at multiple-decade lows against
major currencies.
Oil futures have been driven to record levels in recent months partly because
they offer a hedge against a weak dollar.
Other energy futures followed oil's lead. Nymex December heating oil rose 1.59
cents to $2.5452 a gallon while December gasoline futures added 1.87 cents to
$2.3557 a gallon.
Natural gas futures advanced 7.6 cents to $8.406 per 1,000 cubic feet.
October 17, 2007
The New York Times
By JAD MOUAWAD
The price of oil jumped to yet another record yesterday, sparking predictions
that motorists would see sharply higher gasoline prices by Thanksgiving — and
fears that $100-a-barrel oil is no longer such a distant prospect.
Crude oil for November delivery settled at a new nominal high of $87.61 a
barrel, up $1.48. Futures touched $88.20 a barrel during the day yesterday,
after jumping nearly 3 percent on Monday.
In recent years the economy has seemed immune to rising energy prices, but some
analysts fear that as they spiral higher they will undermine growth, already
strained because of the downturn in the housing market. Such concerns
contributed to a stock sell-off yesterday, with broad market indexes closing
down about a half-percent.
Oil traders, discussing the latest rise, cited a potential conflict on the
border between Turkey and Iraq that could heighten Middle East tensions and
possibly affect oil supplies from the region.
“Markets hate uncertainty,” said Lawrence J. Goldstein, an economist at the
Energy Policy Research Foundation. “The fundamentals are very supportive of high
oil prices. But the latest run-up has nothing to do with market fundamentals,
but has to do with fear.”
Since the American invasion of Iraq in 2003, oil exports from northern Iraq
through Turkey have been sporadic at best because of frequent bombings of Iraq’s
northern pipeline. But as oil producers worldwide are straining to meet demand,
commodity investors are focused on anything that might hurt supplies.
Turkey is an important corridor for oil exports from Iraq and the Caspian Sea.
The Turkish military has threatened in recent days to cross the Iraqi border to
root out Kurdish separatists who have mounted attacks inside Turkey.
Oil prices have more than quadrupled since 2001 as strong demand for oil from
Asia, the Middle East and the United States has outpaced the ability of
producers to bring on new supplies. With little spare production capacity, the
oil markets have become more volatile.
After adjusting for inflation, oil prices are getting closer to historic levels
reached in the early 1980s, when an energy crisis, the Iranian revolution, and
the outbreak of the Iran-Iraq war sent prices spiraling to about $100 a barrel
in today’s dollars.
Energy analysts generally believe the market is overreacting to a possible
Turkish incursion into northern Iraq. Antoine Halff, an analyst at Fimat, an oil
brokerage, said he expected prices to ease once the market realized supplies
would not be affected.
“The rally seems bound to run out of steam,” he said.
In the meantime, though, higher crude will translate into more costly gasoline,
according to AAA, the automobile club. Gasoline has declined in recent weeks
after demand dropped with the end of the summer driving season. But that is
likely to change as refiners begin passing on higher oil costs to consumers,
according to AAA’s spokesman, Geoff Sundstrom.
Gasoline averaged $2.76 a gallon nationwide yesterday, according to AAA.
Gasoline exceeded $3 a gallon this summer.
Reacting to the rally of the last week, the Organization of the Petroleum
Exporting Countries ruled out an emergency release of oil supplies. When it met
in Vienna last month, the oil cartel agreed to a modest production increase of
500,000 barrels a day.
OPEC’s secretary general, Abdalla Salem El-Badri, said in a statement yesterday
that OPEC was concerned with rising prices. But he pointedly added that “there
has been no interruption in crude supplies.”
“While the organization does not favor oil prices at this level, it strongly
believes that fundamentals are not supporting current high prices and that the
market is very well supplied,” Mr. El-Badri said. “The rising oil prices which
we are currently witnessing are, however, largely being driven by market
speculators.”
Most analysts say the reasons behind the price increases are complex. They
include refinery bottlenecks in the United States, a weak dollar, geopolitical
threats in the Middle East, the war in Iraq, violence in oil-producing Nigeria,
and resource nationalism in Venezuela and Russia that is driving away foreign
oil investment.
They also include strong growth in demand from China and the Middle East, where
fuel prices are kept artificially low through government subsidies.
The International Energy Agency, an energy adviser to industrialized countries,
said last week that it expected global oil demand to jump by 2.4 percent next
year, to 88 million barrels a day. Some traders cited that prediction as one
cause of the rally, although several analysts said the figure was
unrealistically high given the slowing global economy.
“There is a perception that fundamentals are more bullish than they actually
are,” said Roger Diwan, an analyst at PFC Energy, an oil consulting firm.
Investors and hedge funds have also contributed to the run-up. Commodity
investors seem to have shrugged off the risk of a recession in the United States
after the Federal Reserve cut interest rates last month. As a result, they have
returned to commodity markets in force recently, analysts said.
Some investors are buying oil to hedge against the decline in the value of the
dollar. Since the beginning of the year, the dollar has declined nearly 8
percent against the euro.
WASHINGTON (AP) — Oil prices settled above $61 a barrel
Friday to finish 2006 roughly where they began, marking another tough year for
energy consumers and another stellar one for the petroleum industry.
On Friday, light sweet crude for January delivery rose 52
cents to settle at $61.05 a barrel on the New York Mercantile Exchange, up a
penny from where they ended last year.
Nymex oil futures peaked at $78.40 on July 14, but averaged $66.25 for the year,
compared with $56.70 in 2005 and $41.47 in 2004.
It was the fifth straight year in which oil prices were higher than the year
before, on average.
Many analysts are looking for that streak to end, but they still expect
crude-oil futures next year to average more than $60 a barrel because of robust
demand growth in Asia and the Middle East, efforts by OPEC to trim supply and
market-rattling instability in energy-rich countries such as Nigeria and Iraq.
Slower economic growth in the USA and a production spurt from non-OPEC countries
should keep prices below the 2006 average, analysts said. And with expectations
of fewer refining bottlenecks, gasoline and other fuels should be less expensive
— though not cheap when compared with costs from just a few years ago.
"There will be an easing of conditions, but not a dramatic reversal," said
Antoine Halff, an analyst at Fimat, who cautioned that supply disruptions —
whether the result of hurricanes or geopolitics — have the potential to cause
short-term spikes.
"Nigeria looks increasingly unstable," Halff said, adding that internal politics
in Iraq could hamper that country's all-important oil sector, too. The other
country to keep an eye on is Iran, whose nuclear ambitions recently prompted
United Nations sanctions.
The average retail price of gasoline in the U.S. ended the year around $2.34 a
gallon, or 14 cents higher than a year ago. Analysts say the $3 level could be
within reach in some parts of the country next summer, but that prices in 2007
should mainly be lower than in 2006, when they averaged $2.38 a gallon
nationwide.
Oil Price Information Service analyst Tom Kloza said he expects the cost at the
pump for the eastern two-thirds of the country to rise to $2.50-$2.80 a gallon
ahead of summer, the peak demand period. Motorists out West will, as usual, pay
even more, he said.
Kloza said "petronoia," or fears about supply disruptions, should drive the
retail price of gasoline to $3 a gallon and more in California, Nevada, Oregon
and Washington.
The price of natural gas plummeted almost 41% from start to finish in 2006
thanks in large part to mild weather and bulging U.S. inventories, but remained
high by historical standards. For the year, natural gas futures averaged $6.98
per 1,000 cubic feet, or 23% below the 2005 average of $9.01.
Natural gas futures settled Friday at $6.299 per 1,000 cubic feet, an increase
of 5.1 cents. In other Nymex trading, heating oil futures declined by 2.52 cents
to settle at $1.5979 a gallon, while unleaded gasoline futures fell 4.02 cents
to settle at $1.5419.
The high price of oil and natural gas throughout 2006 was a boon to major oil
companies such as ExxonMobil (XOM), Chevron (CVX) and ConocoPhillips (COP), who
are expected to earn more than $70 billion combined, according to analysts
surveyed by Thomson Financial. In 2005, the same three companies raked in just
under $64 billion.
Their soaring profits and stock prices again caught the attention of Congress,
which will be controlled by Democrats next year for the first time in more than
a decade.
A price below $60 a barrel would be welcome news to energy-intensive industries,
particularly airlines, which have retooled their operations to use fuel more
efficiently but are still struggling to maintain profitability.
Global oil demand is expected to rise 1.5 million barrels a day to 86 million
barrels a day in 2007, according to the Paris-based International Energy Agency.
But this increased consumption shouldn't burden the market too badly, analysts
say, because supplies from non-OPEC countries in Africa, Latin America and the
former Soviet Union are anticipated to rise by nearly that much.
